“Am I taking my company in the right direction?” “What will growth look like for our startup?” “What does our future hold for our business?” These are all common quandaries entrepreneurs face at some point in their journey. You want to be empowered to make smarter business decision to help you reach your goals, but where do you start?
Financial modeling is a critical exercise for startups at every stage of growth, yet is so often misunderstood and pinned as an overly complicated endeavor. As your company evolves, your business model will change. A solid understanding of the mechanisms that will help your business succeed, or fail, is critical.
Before we dive into what financial modeling is and why it’s important for your startup – let’s start by discussing what financial modeling is NOT. Financial modeling is not cashflow forecasting. It’s not calculating detailed predictions of your company’s financial future. It’s also not building a budget. So often, people get these exercises confused with financial modeling.
So, what is financial modeling?
Financial modeling often refers to a three year plan used to steer your company in the right direction. The goal being to come away with a deep understanding of your business. It’s “an abstract mathematical representation of how a company works (and most importantly, how it will work going forward),” claim our friends at techstars.
What it actually looks like.
We recommend that founders and executives meet annually for a financial modeling refresh (*off site with a cocktail usually works best*) to discuss what is truly significant about your business. Completing this exercise each year keeps your team focused on the big picture and moving towards your goals.
Here’s a pro tip – do your research ahead of time. We typically recommend owners carve out four to eight hours per session. With solid preparation, you’ll have the freedom to discuss the strategic rather than getting stuck in the tactical. This is a time to think big picture. Step back, look at the whole of your business. Define your ultimate goals and what you will need to accomplish in order to meet them.
Why it all matters.
When owners are directly involved in building their business’s financial model, they’ll walk away with a vision of the next three years in business and the confidence to make smarter decisions going forward. Total understanding of a streamlined revenue model is critical for pitching and closing new investors and will keep your key business decisions metrics-driven.
Financial modeling is a critical step to achieving a deeper understanding of your business, where it stands and if it’s sustainable. Not sure where to start? We would love to help you understand the broader impact of your business decisions. Contact one of our financial experts today for insight.