Design a working startup financial model
In order to secure investment, you need to present a financial model that demonstrates your startup’s potential. But what goes into a good financial model? And how do you make sure it is accurate and realistic? This guide will walk you through the essential steps of creating a working financial model for your startup.
Why it is important to design a working startup financial model ?
Introduction
Creating economic structure helps to organize and keep track of the assumptions you’ll test as you implement your plans. The figures you project compared to your actual numbers help guide you through the startup phase and beyond. To get the insight you need, you require the numbers. For that, you need a financial plan with proper metrics and design a working startup financial model.
Two different approaches on financial structure
- Top-down approach – Working from a macro/outside-in perspective towards a micro view. Industry estimates are a starting point and narrowed down into targets that are fit for your company. The top-down method helps you to define a forecast based on the market share you would like to capture within a reasonable timeframe.
- Bottom-up approach – The con of the top-down approach is that it might cause you to forecast too . The bottom-up approach is less dependent on market factors. Yet leverages internal company-specific data such as sales data or your company’s internal capacity. Contrary to the top-down method, the bottom-up approach begins with a micro/inside-out view and builds towards a macro view. This means a projection made based on the main value drivers of your business. Performing a bottom-up analysis, thus, does not only force you to think about what are realistic targets. But also to think about the ways in which you will spend your resources
What should be included for leading successful startup
To design a working startup financial model is a quantification of your overall business and should therefore be a reflection of your strategy, business model, and vision. It is, therefore, accurate to say design a working financial model and business model canvas are two sides of the same coin.
- Revenues – The first part of a financial plan is the revenue forecast. Forecasting revenues is typically performed using a combination of the top-down and bottom-up methods. Use the bottom-up method for your short-term sales forecast (1-2 years ahead) and the top-down method for the longer term (3-5 years ahead). This makes you able to substantiate your short-term targets on a detailed level, while at the same time your long-term targets demonstrate the desired market share and the ambition an investor is looking for.
Factor in how many employees you have or plan to have. This is often your greatest expense when first starting out. You need to consider your goals and how many employees you need to reach and how much will it cost to hire these employees along with the costs of recruiting.
2. Operating expenses – Operating expenses are those expenses that a business incurs as a result of performing its normal business operations. They are not necessarily needed to produce the goods that are sold or to deliver the services promised. They include costs related to the supporting and operational side of the business, such as sales and marketing, research and development and general and administrative tasks. Typical operating expenses for startups include events, traveling, legal costs, online marketing, etc.
Determine the right KPIs. These are figures — including any assumptions — you can track, such as growth rate. Only include the KPIs you’re able to track. Consider the industry’s standard KPIs and start there.
How to raise funds for your startup?
Many startups design a working startup financial model because they are looking to raise external funding. Whether you are applying for a loan at a bank, trying to convince an investor of the potential of your firm, or are applying for a subsidy; in most, if not all cases you will need to provide your investors with a financial plan.
- Financing via debt: an example of financing via debt can be a loan that you receive from a bank, a business or an individual where you agree on specific terms regarding payback and interest. For startups, it can be difficult to receive a loan from a bank as there is a lot of banking red tape involved and banks are generally more risk-averse as compared to new age investors.
- Financing via equity: an example of financing via equity is funding you would raise from an angel investor or a VC in return for shares of your startup. For startups, financing via equity is more common than debt financing, because receiving a loan can be difficult.
Advantages of using a start financial model
There are different reasons why to engage in financial modeling as a startup. You might need a financial model to build an economically viable business, to be better prepared for the future, to communicate your company’s performance to potential shareholders or new investors, or simply to set targets for your company you can work towards.It can be worthwhile to create several scenarios of a financial model and to check for common places you can fall in financial modeling for startups. Creating multiple scenarios helps to get closer to a realistic case, instead of presenting an overly optimistic or a hopeless case.
Conclusion
Having a financial model can help in the fundraising process, as external investors typically require you to provide a forecast. This makes sense, considering the fact you are asking them to put their money into your company.
Financial modeling is quite important especially when you’re an entrepreneur with your own company. This article includes everything you need to know about building your own working financial model.
Author : Namita Gupta is a content writer with Axiswebart who’s been working with other well renowned organizations too where she is writing and handling content strategies.
