6 Benefits of Financial Modeling You’re Overlooking
What makes a startup exciting?
Most of the time, it has to do with the “big idea” – the vision to create a new product or service, disrupt a static industry, and carve out a niche with a new household name. Every successful business has to be fueled and inspired by its master plan and goals.
What isn’t as exciting to most, however, is all of the financial minutiae and data that stand behind growing companies.
No business, however, can achieve its goals without in-depth financial modeling.
Combining historical data and current day KPIs, financial modeling gives entrepreneurs a snapshot of where their business stands financially, and where it’s headed. Regularly-maintained financial models give you a clearer picture of your company’s future revenue and growth projections, and provide hints on the best times to fundraise and add team members.
You need a great idea to start, but supporting your vision with the right financial modeling tools is just as important to your business’ growth and success. Also, spoiler alert: templates and spreadsheets are old news. There are now dynamic, easy ways to build a financial model that delivers the insights you need.
Here are six reasons why financial modeling is integral to any successful business plan.
1. Build a Blueprint for Your Business
No matter how handy you are, you likely wouldn’t start building a house without a blueprint. Before you begin hammering nails and mixing concrete, you’re going to need some sort of guideline for what you want your house to look like.
In a similar way, a financial model is the blueprint for your business. Financial modeling provides entrepreneurs with an outlet for their ideas on the future of the business.
How will the business make money? How fast will it grow? What type of expenses do we need to budget for?
These are the types of questions a sound financial model helps answer. As you plan, prototype, and test your product or service, you’ll tweak your financial model to maintain a clear picture of the future.
2. Give Yourself Something to Measure Against
That last point is crucial.
Your financial model isn’t meant to be a “set it and forget it” function. Your model is only as accurate as you make it, so consistent maintenance is crucial.
And of course, your model is exactly that: a model. It’s a projection, so it’s always important to measure actual results against what your financial model predicts.
If things don’t go as planned, you can refer back to your model (and the assumptions you made in forming it) to see where your projections were off. On the other hand, if things go better than planned, you can extract some pearls of wisdom from your conservative projections.
Each time you tweak your model, you’ll have more data to draw on for the next iteration.
3. Steer Clear of the Cliff
Running out of cash is a major threat for growing companies, accounting for 38% of all startup failures, per data from CB Insights.
Many founders don’t realize they’re running out of money until a couple of months before they do.
A properly-maintained financial model can help you see the warning signs of low cash before it’s too late, extending that timeframe to 6-9 months. That gives you enough time to correct your course. This brings us to our next point.
4. Strategically Time Your Fundraising
Raising capital is all about being strategic.
Wait too long to fundraise, and you’ll reach the “no cash” cliff. Raise too much money, however, and you risk unnecessary dilution of your shares.
The best startups are the ones that go out for a capital raise at the right time. A financial model will help you identify the most efficient time to seek out an investment partner, and when it’s best to put your head down and continue growing.
5. Grow Your Team the Right Way
While many of the benefits of financial modeling involve looking forward, you can also use your projections to work backwards.
In order to reach your future goals, you’ll need the people power of sales, product, and marketing talent. Knowing who you need to execute your blueprint, and when, is crucial to make sure you grow at the rate you plan.
Attracting talent has never been more difficult, so founders need every advantage they can muster.
Rather than suddenly realizing you need five new sales representatives in the next month, use your financial model to game out a hiring strategy that can stretch over several months.
6. Communicate with Key Stakeholders
Financial models aren’t just for founders and CFOs. They’re a fantastic tool to keep all stakeholders abreast of future plans.
Of course, investors will be intrigued to see the vision of your company, clearly communicated.
An up-to-date financial model also delivers key insights to startup advisors, who can tailor their advice to where the business is headed. Internally, employees can know what to expect, when to start reaching out to their network for new hires, and feel engaged in the success of the company.
Financial Modeling Made Easy with Finmark
Finmark was founded on the idea that creating a financial model doesn’t have to be complicated. Built for founders, by founders, Finmark skips over clunky, complex spreadsheets to create accurate, visually appealing financial models to help entrepreneurs.
If you want to take it for a spin and build your model, get a free trial here.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.