Looking to build a sustainable future for your startup business? Thinking about ways for funding? Want your startup to avoid going bankrupt?

Well, if you’ve answered yes to any of those questions, then you’re in the right place. To reduce the risk of your business failing, having a financial model for your startup is crucial. This guide will provide everything you need to know about financial modelling for startup businesses, as well as the best practices and tips.

So, shall we get started?

What Is A Startup Financial Model?

A startup financial model is the forecasting of a business’s future, linking in with a plan and budget aiming to guide the early years of the company’s life. A financial model will include the employees, revenues, customers, capital costs and expenses to give goals for the future.

Why Should I Build A Startup Model?

A startup model can help your business to map out key metrics and predictions that can be used to later execute your business plan. Often, the model won’t be 100% correct, but that is fine as the differences you see between the forecasts and the actual results will allow you to gain a true insight into your company’s full potential.

Having a clear understanding of the projections and the results can advise your team on crucial decisions that can propel your business forwards. Startup modelling can be important in making many decisions, such as:

Raising capital
Managing your business
Dealing with acquisitions and mergers
Investment decisions

What Are Types of Startup Financial Model

For any startup, even if it isn’t generating any income yet, having a model is important. There are different types and methods of models, with some business analysts using multiple techniques. So, what does a good model consist of? Well, to make it simpler, two things it should be are:

Well thought out.
Structured, dynamic and easy to understand.

Having a well-constructed and thought-out model shows you are taking a professional approach to running your business, as well as wanting to be taken seriously by others. Let’s get right into the different types of start up models. We’ll break it down into top-down and bottom-up approaches.

Bottoms Up Startup Model	This is where you create around 10 to 15 core forecasts about your business. It is recommended to think about a specific product you’re selling, and focus on the direction you want to take it. This can be the distribution strategy, marketing and scalability. You can utilise this strategy, working from the ground up to grow the business to its full potential.
Top Down Startup Model	This model is recommended for companies that have an idea of how much it needs to make in a certain amount of time. Here, you can focus on data such as margins, profit, revenue and numbers you need to make to hit goals and targets. It allows you to work backwards from the bigger goal to reach your destination.

How Do I Create A Business Startup Model?

So, you’re thinking about creating a business startup model, but don’t know where to start? Or, you’re just looking for some advice and guidance with your model? You’ve come to the right place as we’ve got you covered.

Starting With Your Goal

Deciding on the goals of your business model will give you an understanding of how detailed your project needs to be. If you are raising finance, for example, you don’t want the model to be too detailed, as investors may not want to be overwhelmed.

So it all depends on your goals of the model as to how much detail should go into it. There are model templates online, giving you an idea of where to start.

Decide Your KPIs

KPIs are figures that you can monitor and track. Make sure the KPIs you include are trackable, otherwise they are useless and can make you look unprofessional. Start with the industry’s standard KPIs, and start there.

Merge Your Actuals With Projections

For those that are currently running a business, taking some time to merge your current results with your projections can be a good way to see where your actual results can align with the forecasts. Starting with the reality of your business can show tell-tale signs that your predictions are correct or are way off.

Look At Revenue

Taking a view of your revenue can give some important signs. What is driving your revenue? What activities are promoting growth? Can you capitalise on these? This can allow you to break down and balance your current model to help make future projections. Review your cash flow, balance sheet and map out where you want the business to go.

Employee Check

To achieve your business goals, how many employees do you think it will take? How much will each member of staff cost you? These expenses all add up and can easily be overlooked. Also, remember, recruiting isn’t free. Take these costs into account too.

Added Extras

Research other companies and see how they scale their business up and what expenses were needed. Not many companies have more than a 50% pre-tax profit margin, so be aware to add these expenses in.

Working Capital

Cash flows can be impacted heavily if you don’t know when your customer is going to pay you. Also, be aware of when you owe funds to your suppliers and it can affect your budget.

Projection Review

The last one, be thorough. Is your model solid? Does it make real sense? Does it provide the look you had hoped for? Take some time for a sanity check and make sure your model is sensible.

What Are The Pros and Cons Of Making A Startup Business Model?

Business plans will stand your company in good stead, giving you a solid platform to build from and an idea of the way you can reach your goals. However, are they worth the hassle? For short term goals, are they a waste of time? Or do the benefits outweigh the disadvantages?

Advantages Of Making A Startup Business Model

A better understanding of where to allocate resources.	Being able to understand the resources you have, the budget you need and what is required for the future can be essential information. After creating a business model, you have a better idea of what the predictable future of your company is going to be, making it easier to change and adjust to avoid any obstacles that may interrupt your progress. This makes for a smoother and less stressful journey.
The whole team are on the same wavelength.	Working as a team is one of the most essential parts of any successful business. Communicating and operating on the same page will make your progress much quicker, with fewer bumps in the road. So when multiple people are working at your company, they will have different opinions on which way you should take the business. Having that structure and plan will ensure everyone is pulling in the same direction and knows what direction the business is going. This removes people going rogue, allowing everyone to funnel their creative energies into the right projects.
Useful when planning for finance and credit.	There may come a time when you need a line of credit. When this time comes, a business model is essential. The financial institution you contact will want to see your plan, knowing the risks involved and if your company is worth helping. A good, solid model will also make your business look more professional and organised, helping to enhance the chances of being accepted. There are financial institutions that won’t give you an appointment unless you have a formal business model, so get yours prepared and ready for when the time comes.
Creates a forecast for your businesses future.	Having a business plan will give you the likely outcome of where you are heading, whether you are on course to be successful, or if you may need to tweak some areas to develop. The future for your company might be slightly uncertain, but you can have a better idea of where your business is forecasted to be in the near future.

Disadvantages Of Making A Startup Business Model

Can restrict freedom.	A business model can be restricting in what you do. Businesses need creative people to succeed, however, these skilled employees need the freedom to be able to come up with new and exciting ideas. The standard model will set goals and rules in place for everyone, so there is less chance for those creatives to implement their thoughts.
Risks of being inaccurate.	If you don’t have people around you, the model might be inaccurate. Making sure to include the right people in the making of a business plan is essential. These are the people you want around the big decisions and those who will be big players in the long-term vision of your business. Creating a model on your own can seem like a good idea, on the other hand, having expertise in various fields, as well as a range of opinions can lead to blind spots and inaccuracy.
People need to take responsibility to act upon the model.	The person that creates a business model is responsible for the process. They have the vision and goals for where the company is going, so sometimes it can be created without thinking of others in the business. They may set unrealistic goals for others, overlooking how much work and how expensive certain tasks are that they haven’t done themselves. This will put strain and more stress on other staff.