You've got a brilliant startup idea. Great! But no idea works without a plan.
The good news it that a startup financial model is the plan. This article will explain the goals of a financial model and how to build one that works for your business.
What Is a Startup Financial Model?
A startup financial model is an expression of your goals. For instance:
- How many customers do you think you'll have?
- How many people should you hire?
- How will you improve your margins over time?
Creating a startup financial model helps you organize and keep track of the assumptions you'll test as you implement your plans. Even the best financial models aren't always correct — but the figures you project compared to your actual numbers help guide you through the startup phase and beyond.
A good, functioning model illustrates your potential. It also helps you make good decisions when you understand why your projections and actual results are different.
To get the insight you need, you require the numbers. For that, you need a financial plan with proper metrics. Start a free trial of Baremetrics to get started on the right foot.
Startup Financial Model: Getting Started
- Determine the right KPIs. These are figures — including any assumptions — you can track, such as growth rate. Including any KPIs you're unable to track is useless. Consider the industry's standard KPIs and start there.
- Use a startup financial template. Starting from scratch isn't suggested and building a model in Excel can be time-consuming. You can use ours!
- If you're in operation, merge actuals with projections. Your real numbers help keep you grounded. Anything unrealistic in your model, when compared with actual numbers, can offer insight into where your projections might be off. Take a look at conversion rates, customer acquisition costs, and overall financial performance.
- Start with revenue and work from the top to the bottom of your income statement. Revenue models can help — but when you consider potential revenue, you must understand where it comes from. What's driving it? For instance, do you have a certain number of sales agents or current customers or a specific marketing activity planned? You also need to factor in COGS when making financial projections. Review your balance sheet, cash flow statement, and other financial statements.
- 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 them. How much will it cost to hire those employees? And don't forget the costs of recruiting. Even if your network is large, it's likely you'll need to hire down the road.
- Estimate additional expenses. Take a look at other SaaS businesses and review your business plan. How did they scale their expenses as they grew? It's vital for your cash flow — especially if you're an early-stage startup — to factor in additional expenses as time goes on. There aren't many companies that have greater than a 50% profit margin before taxes, so expenses are crucial to your numbers. Financial modeling or cash flow forecasting software is great for this.
- Working capital is important to your business model. Knowing when your customers will pay — and when you owe your suppliers and vendors — is huge. Your cash flow and subsequent budgeting are affected.
- Review projections. Take another look at your startup financial summary. Is it sensible? Does it tell the same story you pictured? Perform a sanity check.
Learn more about the metrics that are most important for your financial model. Start a free trial of Baremetrics today.
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Bonus Tips to Consider
- Know and understand your user metrics. Model monthly for such things as how many new users you gained, lost, or upgraded.
- Annual contracts matter. How long are your contracts? How often do you receive payment? What's your monthly recurring revenue (MRR)? Offering annual-only memberships paid upfront defers revenue — which is good — but it can pose certain modeling challenges, such as keeping tabs on churn.
- Different membership tiers need their own model. If you offer more than one type of subscription, create a financial model for each pricing tier. This helps you understand how each user plan influences your growth and your overall profitability.
How Baremetrics Can Help
You can't get the figures you need for ongoing modeling without tracking metrics.
That's where Baremetrics comes into play.
We offer a comprehensive understanding of your business with metrics like churn rate, customer lifetime value, and more. You can see for yourself with a free, 14-day trial of Baremetrics.
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