Whenever someone starts a new business there are so many moving parts. You want to build out an undeniable offer, build reputable branding, and get all of your chickens sorted. However, one thing that is usually overlooked are financial models. Some prominent investors claim that it’s better to focus on growth and customer acquisition rather than putting time and effort into projects. However, dismissing financial models as a whole can be a costly mistake. Here are four reasons it might be worth looking into financial models and how it could help your early-stage startup.
You’re seeing growth and sustainability, so now you turn your focus and attention into fundraising. This is when financial modeling will come into play because at least one investor will ask about your numbers. Nothing suggests you’re out of place faster than stumbling over a simple question about your finances. Even if your numbers are purely projections, having a financial model allows you to answer questions with clarity and demonstrate that you’re grounded in reality. Keep in mind that investors know forecasts aren’t exact, but they do want to see that you have a handle on your finances and can articulate your assumptions.
Taking the time to build out your financial models doesn’t mean you’ll just be crunching numbers. You’ll basically be defining your vision of the business. Modeling revenue projections, costs, and growth paths gives you a better idea as to where your business can go and where it’s at now. Do you see yourself pushing the boundaries of a $100Mn+ revenue business or does a more niche business model work better?
You’ll have to familiarize yourself with the financial levers of your business and that means you’ll know pricing models all the way down to the nitty gritty of unit economics and they can show how small changes in your business model affect your bottom line. Understanding these metrics or dynamics will help you to make more informed decisions when scaling, improving profitability, or even adjusting growth strategies.
This actually sounds a lot worse than it actually is but if there’s one certainty with financial projections, it’s that they’ll be wrong. But, constructing a plan helps you grasp where the biggest risks and uncertainties are. When you have a roadmap, you’re better equipped to adjust as reality deviates from your forecast. Identifying areas of variability can help you build out adjustments to make as the business changes.
While it’s something many people overlook and it’s relatively easy to continue to overlook financial modeling, it’s a practice that can pay off further down the road. Even if the model isn’t perfect, it’s an exercise in understanding your business, preparing for critical investor conversations, and avoiding common financial struggles. Instead of look at it as a time drain, maybe you can view it as an investment in your future business acumen and strategic planning.