2 min read A financial model is a summary of a company’s financial performance for a set duration of time. Financial models can be used externally to share information with investors and internally to make important business decisions. In this article, we look at what you need to include when building your financial model, the benefits of using an up-to-date financial model, and possible uses.
What To Include in a Financial Model
When you are building your financial model, make sure to include the following:
- Revenue projections: This is an estimate of revenue from all sources.
- Cost of Goods Sold: This projects how much it will cost to build and deliver the product or service.
- Customer acquisition costs: This is an estimate of the sales and marketing expenses required to acquire the customer.
- Operating expenses: This is the cost of running your business, such as the monthly price for office space and utilities.
- Capital expenditures: This is an estimate of the cost to acquire physical assets such as equipment and machinery.
- Cash runway: This refers to the amount of cash available based on operations as well as any fundraises.
It is also useful to include metrics such as customer acquisition cost and customer lifetime value.
Benefits of Using a Financial Model
An up-to-date financial model is a must-have for every startup as it can help you make management decisions. It can be used to:
- Determine what positions to hire and when.
- Measure the performance of the team and highlight problem areas.
- Shows areas that are out of their target cost or performance zone such as having too much of a given resource.
- Determine your valuation range for a fundraise or exit event
- Find ways to reduce the risks in the business.
- Create consistent results by managing both cost and revenue drivers.
- Provide ongoing monitoring of the business.
Consider setting up the financial model for daily and monthly operational use as well as for fundraising.
Ways To Use a Financial Model
After building your financial model you can use it in several ways. Examples of use cases include:
- Raising funding for the business by determining how much you need to raise and when.
- Generating financial forecasts and projections for managing the business.
- Projecting key financial statements such as profit and loss statements, balance sheets, and cash flow statements.
- Setting up budgets for daily management of the business, particularly around cash flow.
- Determining hiring decisions including what roles to fill and when.
- Setting strategic plans for growing the business.
- Estimating the value of the business for negotiating acquisitions by other companies.
Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://www.startupfundingespresso.com/calculators/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: email@example.com.