6 Financial Modeling Mistakes to Avoid
Creating a financial model is part science and part art. The science is ensuring all your numbers and calculations are correct. The art is in making the right assumptions about how your business will grow.
Screw up either part and it’s a recipe for disaster.
In this article, we’re going to share six of the most common financial modeling mistakes you can make and the best ways to steer clear of failure.
Let’s dive in.
1. Obsessing Over the Perfect Model
Let’s face it – things move fast when running a business.
As a founder, it’s easy to obsess over every small expense that factors into your financial model. There are benefits to being organized, but having every expense listed in your model will make it overly complicated.
Complication means that the margin for errors significantly increases.
Your model isn’t supposed to forecast where your business will be in five years down to the penny. It’s a tool to help you plan based on historical data, your current situation, and your assumptions for the future.
2. Forgetting About Your Model
There may be issues with obsessing over your financial model, but a far worse mistake is not keeping your model up to date.
A good rule of thumb is that your financial model has a half-life of a month. Each month you don’t update your model is a risky move that may put your business in a bad financial position.
Every month that goes by, your actuals are different than what you thought they’d be. After six months go by, the data in your model is likely completely wrong if you’re not updating it, which makes it almost useless.
3. Only Planning for One Scenario
While you don’t want to overcomplicate your financial model, you do need to think about multiple scenarios.
Having a one-track mind will hurt you in the long run, but having multiple scenarios built into the financial model can ensure you’re adequately prepared for anything that the startup world may throw at you.
At a minimum, we recommend having three scenarios in your financial model:
- Your base scenario assumes steady and consistent growth.
- Your upside scenario is more optimistic and assumes exponential growth.
- Your downside scenario has less optimistic assumptions about your growth.
Read our guide to learn more about planning and analyzing scenarios.
4. Being Too Optimistic About Your Forecast
While being a “glass half full” kind of person is a great characteristic for a founder to have, being too optimistic can lead to your downfall.
Because taking one month of high growth and basing your model on that increase can backfire.
Before you pat yourself on the back for a job well done, it’s imperative that you dig into those numbers to understand where that growth came from, and if it speaks to a larger trend in the market.
Having a financial model allows you to easily dig into these numbers and plan for future growth.
5. Keeping Your Model to Yourself
Unless you are still in the “garage” phase of your business with no one else involved, you shouldn’t be the only person on the team with access to your financial model.
At a base level, you should be sharing the financial model with other members of the leadership or executive team. This allows for a level of transparency, collaboration and accountability. Not only will others have insights you might’ve overlooked, but it’s also a good way to keep everyone on the same page.
Your revenue goals affect hiring, product roadmap, and more. Not having others in the loop means that goals may not be met.
6. Using a Templated Model
Spreadsheets were once the de facto choice for businesses, especially when it came to financial modeling.
However, with the advent of new technology, spreadsheets have slowly become the last choice for founders when building their businesses.
For financial modeling, spreadsheets make sharing and collaborating on your model difficult. Not to mention, you run the risk of version control spiraling out of control.
Further, a templated model hinders the opportunity to customize a model to fit your business. Check out this article for more insights into how financial modeling templates are hurting your business.
Avoid These Financial Modeling Mistakes With Finmark
Finmark helps you avoid the most common pitfalls of financial modeling, so you can be confident that you’re making smarter financial decisions based on accurate and up-to-date information—all while providing a better experience than spreadsheets.
Whether you’re a CFO looking for an easier way to manage and update their model, or a founder who wants something more intuitive and easier to work with than a spreadsheet, Finmark has you covered.
With Finmark, you can:
- Create unlimited scenarios
- Automatically sync actuals from tools like Stripe, Quickbooks, and Xero
- Easily share your model with investors and stakeholders
- Visualize all your KPIs with beautiful charts and graphs
If you want to avoid all the financial modeling mistakes above, try Finmark today.