I looked into every single video about Financial models on Youtube, and they all start with a spreadsheet.
And yes, of course, that’s what the Financial Model is, and we’ll get to spreadsheets today- but before that, we need to get on the same page about what the financial model is, how it should work, and the most common startup founders make when doing them.
A financial model is a sheet at which you through data: your expenses, your assumptions about the business, real benchmarks from other companies- and on the other side it should spit out some key company questions.
Some of them are urgent, almost life and death questions for your business:
- How much runway you have (how long until you run out of money).
- Can you afford that new hire? Or that new campaign?
- If you’re looking for investors- how much money do you need to raise, and when?
I’ve seen way too many founders put ‘we’re raising $1.5M on their pitch decks, and not have any numbers to back that up- or any idea where that gets them. And that, of course, falls apart really quickly when investors ask questions.
Other answers, more mid-term:
- How big can the company get?
- How much will getting that big cost?
- How effective will that campaign be?
- What is my company valuation?
Now the way many companies approach this is by putting out a few revenue assumptions or a few user assumptions.
This is how many users we’ll get every month, and therefore this is how much revenue we’ll make. Or even worse, they’ll say- we are going to grow revenue 10% every month this year. Period. And to do that here’s a marketing budget, and here’s who we hire.