
If you’re running a startup, you want to set your company up for the best possible future. And while the future is impossible to predict 100% accurately, financial modeling can help you forecast what’s likely to happen next for your startup.
Whether you’ve been operating for a few months and are looking to secure more funding, or you’re just getting started and want to ensure your business grows at a sustainable rate, financial modeling can guide your decisions and set a solid foundation for success.
What is a Financial Model for Startups?
Financial models are representations of your company’s financial situation, designed to help your company predict future performance based on your current financial data and position in the market.
Startup financial models are typically composed of a few different analyses, including:
- Revenue projections
- Cost projections
- Break-even analysis
By pulling data from your startup’s balance sheet, profit and loss statement, and cash flow statement, you can analyze and estimate your future sales, costs and expenses.
Models serve many purposes for startups:
- They act as a roadmap to set benchmarks and goals, and make informed decisions for your company’s future.
- They explore best- and worst-case scenarios your business may face in the upcoming months.
- They help you stay liquid and avoid running out of money.
- They can help you optimize your daily operations.
- They can help you raise funds by providing investors with a clear view of your startup’s potential.
- They help you inform your shareholders about the financial health of your company.
Even if your startup has yet to make its first sale, developing a financial model is essential.
Now, let’s take a look at what information and tools you’ll need to create accurate and useful financial models for your startup.
What Does Financial Modeling Require?
Financial Modeling Software
For many startup founders, financial modeling can seem intimidating, time-consuming, and complex—especially without a finance background.
Luckily, you don’t have to go at it alone or build spreadsheets from scratch in Excel. There are several accounting software options designed specifically for startups and small business owners.
What Accounting Software is Best for Startups?
With dozens of accounting tools available, how do you choose the right one for your startup?
QuickBooks Online, or QBO, is perhaps the most well-known accounting software, and it works well for startups and growing businesses, as its services can be scaled up or down depending on your needs. It can also integrate with other software, such as payroll tools.
Xero works well for multi-user small businesses and offers plans to suit early-stage, growing and established businesses alike.
FreshBooks is a great choice for small service-based startups since it automates invoicing and accounting processes.
Wave offers a free starter plan and is ideal for very small businesses that need to send numerous invoices.
Comparing different software options can help you decide which is right for your startup.
Is Accounting Software Worth it for Startups?
Some startups and small business owners believe they can handle accounting and financial projections on their own to save on software costs. But is investing in software really necessary?
In most cases, yes. Accounting software is an invaluable tool, even for small startups on a tight budget.
Software saves you valuable time by streamlining nearly every aspect of business. It can help you automate repetitive tasks like billing, financial reports, calculations, data analysis and more—all with extreme accuracy.
Besides, accounting software is designed for entrepreneurs, not financial experts. It features user-friendly, intuitive interfaces that help you complete tasks with ease.
Accurate Historical Financial Data
The next thing you’ll need to create financial models is data.
The most effective financial models are based on your company’s own historical data, which includes sales numbers, expenses, costs, investments, assets and more. If your business has been operating for a while and you’ve kept your finances well-organized, you likely have this information at hand.
By using this data, you can apply a bottom-up approach to forecast future months, analyze scenarios, set new goals, and make adjustments to prepare for growth.
What if My Startup Lacks Historical Data?
If your startup is in the seed phase, or if you have only been in business for a few months, you may not have much in terms of historical financial data.
Moreover, many startups face a challenge: the bottom-up method often doesn’t reveal the true potential of your business. Since startups often grow quickly, early sales may not accurately reflect your future market share growth.
For this reason, startups should also use the top-down approach when making forecasts. This method looks at the big picture, taking into account factors like industry trends and market size. This can help you set long-term goals and demonstrate to potential investors that you can succeed within your industry.
No model is ever completely accurate, but combining both bottom-up and top-down approaches gives your startup the best chance to be as well-prepared as possible.
Frequent Reviewing and Updating
Financial modeling is not a one-and-done exercise, especially not for startups. As your company develops and changes, you should keep your forecast, projections and goals updated and relevant to your real financial data.
How often should a startup revisit and update its financial models? Ideally, every month.
Each month, you’ll obtain new financial data, which you can then use to refine your models and compare your actual data to your projections. You can hone your strategies in real time, give updates to stakeholders and identify areas of your business that you can improve along the way.
Frequent review of your projections also helps keep your company’s growth sustainable, which is important for your long-term success.
Help From a Financial Expert
Financial models are a crucial part of any startup’s success. Nearly half of all failed startups cite funding or cash flow issues as their primary reason for failure.
If you’re finding it difficult to regularly complete financial models for your startup, let the experts help.
Finvisor has been helping startups and small businesses with accounting and CFO support for over a decade. When you partner with us, you’ll receive on-demand accounting and bookkeeping services, as well as guidance to help you understand where your startup should go next.
See how our services can help your startup grow and succeed!
Let's chat
Get on our calendar for a free introductory call.Request a Quote
We'll get back to you within a business day, usually sooner. Or you can schedule an introductory call and get on our calendar."*" indicates required fields