Top 5 Reasons to Build a Financial Model for Your Startup Business

Are you thinking about starting a business right now?

Whether you are going to bootstrap it with your own money or look to get funding from investors, you need to figure out how much cash you actually would need to give your business the best odds of success.

How do you go about doing that? By creating a robust financial model to understand your cash flows.

But there are other benefits to creating a financial model for your startup business.

Here are the top five other reasons to build a financial model for your startup business.

You can use the financial model for investor pitches

Whether they believe your hockey stick growth or not, you should at least show that you have a firm grasp of the critical drivers of your business and that you have made reasonable and sane assumptions about its growth and cash needs.

So you’re going to get 1M users and generate $5M in revenue in the first 12 months? How?

You can run cheap simulations with the financial model

It’s not the same as a field test, but it’s a lot cheaper and a lot easier to start with. And you may be surprised with just how much you could learn just by simulating different business models and market conditions with a financial model.

Getting it wrong in real life can cost you your business, so learn as much as you can as quickly and as cheaply as you can.

You can understand how growth ties with revenue and profits with the financial model

It might seem obvious in your head, but when you start to put your assumptions down explicitly into a financial model, you will spot opportunities and potential pitfalls down the road. For example, you may find that the primary channel for acquiring customers may be too costly to start off with.

You can use the financial model as a benchmark to track your growth

No, just because you model it out in a fancy spreadsheet doesn’t mean it’ll translate into reality. But you can use it to help find realistic yet still inspiring milestones for your business.

Having something to track your progress and compare against will help you determine whether you need to adjust your expectations, execution, or both.

You get to test your knowledge with the financial model

You CANNOT build a useful financial model without knowing your industry and your business REALLY well. So this is a chance to demonstrate it to yourself, your team, and your investors. And if you don’t feel quite that confident yet, the process of building it will help you get there.

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So where do you stand? Could your business use a robust financial model to help you make smarter decisions?

If you’re interested in learning how to build robust financial models for your startup business, join over 43,000 fellow students in my Financial Modeling for Startups & Small Business course, complete with fully built financial models for seven completely different types of businesses.