We've outlined the steps to creating a financial model for your startup.
1. Determine the goal of the model
2. Determine the KPIs for your company
3. Get a financial model template
4. Merge actual results into the template
5. Start with revenue
6. Project headcount needs
7. Estimate other expenses
8. Model working capital
9. Review your projections
Step 1. Determine the goal of the model. This will allow you to determine how complex to make the model. In general, when your market sizing or performing estimates that are back of the envelope simpler is best. The next step of complexity is when you're raising capital with too much detail and your interactions with investors could be lost in the details. You must have sufficient detail to show you know the market. In the end, for a thorough financial model of cash flows for operating businesses it is common to conduct a thorough analysis.
Step 2. Determine your KPIs. The ideal is to have numerical figures and assumptions you'll be able to track. KPIs in a model are unusable if you cannot monitor how you're doing against them! Make use of industry-standard KPIs to get started.
Step 3. Get a startup financial model template. Don't begin from scratch creating a functioning piece of Excel takes a lot of time and is an unnecessary waste of time. Make use of one of the free templates like those on this page.
Step 4. If you have run a business, you can combine your actual results with your projections. It's better to start with the actual results, so that you can adjust your projections. There are kinks or oddities within the model where actual results match projections can indicate there's something wrong in the projections.
Step 5. Work your way down the income statements beginning with the revenue. When you consider the amount of revenue, you'll generate ensure you know the reasons behind that increase in revenue. Is there a certain amount of marketing personnel or even marketing expenditures which will drive the growth in revenue? It is also important to be aware of the costs of selling goods as you plan your earnings. It is important to note that this doesn't work if you're planning a biotech or hardware company that has a long time to generate revenue. Instead plan out the work that you'll have to complete to achieve crucial milestones in the development of your product.
Step 6. For most startups headcount is the largest cost (at least until marketing begins to take over!) How many employees will you require to reach your objectives, and what will each person cost? Be aware of the costs associated with recruiting regardless of whether you have an extensive network, you likely have to recruit in the coming years.
Step 7. Estimate other expenses. Use examples from successful companies to understand how they've diversified their costs. Be sure to include more expenses as the business expands. This should be applicable to your headcount expenses. Only a handful of companies boast 50% of their pre-tax profit margin, so be sure that you're adding expenses!
Step 8. Working capital matters. Learn more about our section. In essence, you need to know the time when your customers will be paying you, and also when you'll have to pay large vendors.
Step 9. Review your projections. Look over the outline. Does it have a sense? Does the model tell the story you had in mind? A sanity-check is always an excellent idea.
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