Having a startup is a fascinating experience. Every day comes with new challenges, as you put your ideas and yourself to the test. From talking to possible investors to fine tuning your product, your to-do list can seem endless, and there’s one thing that should be on top of it. Building a financial model is essential for a startup, and sometimes, founders forget to do one.
A startup financial model is one of the first elements that will provide the foundation for the future of your startup. This article will explain why it’s essential and how to build one. So, if you haven’t made your own, it’s time to start and, if you have, it’s always great to have a refresher.
What is a financial model?
If you don’t have a financial model, it’s okay! The first and most important aspect is that it’s not complicated to grasp its basics. Next, financial modeling considers your company’s past, present, and future operations. From there, you can start adding information that will help you make the right decisions at the right time.
Financial modeling summarizes your startup’s expenses and earnings, usually in a spreadsheet, that you can use to calculate how a decision will impact your company. Not only that, it helps anticipate if and when your company can run into financial hardship.
Having a financial model is helpful because it provides you with a tool for understanding why your projections and results differ. Plus, one of the most valuable benefits that a financial model can provide is that it illustrates your startup’s potential to investors. So, before we explain why it’s so valuable, we’ll detail why founders should care about building a financial model in the following section.
Why should founders care about building a financial model?
A startup needs money, and that’s no secret. Plus, understanding how your company is operating is crucial for its long-term success. So, founders should build a financial model because it provides a tool to help you manage these two critical aspects.
