Why You Need A Financial Model

By Nathan Rose, Assemble Advisory

Too often, early-stage companies will operate for months or even years without financial forecasts. Entrepreneurs tend to be the type that prefer doing to planning, and it’s this very same “ready, fire, aim” attitude that makes entrepreneurs willing to take risk and build businesses in the first place. They’d prefer to spend their time driving sales instead of poring over spreadsheets.

But a financial model is just as indispensable as a business plan. In fact, a financial model and a business plan are best seen as two sides of the same coin – the model calculates, while the business plan articulates.

If your company is ambitious for success, you need to lay out a roadmap for how it plans to reach that success. Here’s how a financial model will be able to help your venture.

Establishes goals

Imagine what you want your business to look like in 2 years from now. Now imagine what the next 24 months will need to look like, month-by-month, to get there. Imagine how many new leads your advertising budget needs to generate. Imagine how your sales staff will need to perform in converting these leads into customers. Imagine the cost-per-unit of production. Imagine how much you will need to charge for each unit in your product range. Is your brain hurting yet? With a model, everything is all in one place for you to refer to at any time. Knowing what needs to happen across every area of the business also provides critical performance standards for everyone within the company to meet.

Improves your business plan

A business plan has very little basis without a financial model that backs it up – the financial model ensures that everything in your business plan has had rigorous analysis put into it, and makes sure all parts of the plan cross-refer to each other consistently. Your business plan will be robust and it will add up.

Helps bring onboard key people

Potential investors almost always demand a financial model. But what many don’t realise is that partners and employees can also be positively influenced by the presence of a good financial model. It seems virtually everyone would rather work with an entrepreneur with a clear vision and a plan of how to realise that vision.

An objective step back

The act of putting together a financial model can reveal unexpected insights about your business. You might not have realised that if you keep spending the way you are, you’ll run out of cash within less than 6 months. You might not have realised that to grow to the level you were imagining within the next 2 years, it would imply an impossible 90% share of the total market. You might not have realised that with all the staff you were planning to hire, you’ll need to spend thousands more than you initially imagined on new office space and computer equipment. It’s better to be aware of these things before you invest too much time or money, rather than have them take you by surprise.

A working tool, on an ongoing basis

Building a financial model is not a one-time thing. Like your business plan, it will adapt as goals are achieved, missed or exceeded. New opportunities will come to light, your business will pivot, and your financial model will change along with your business. You will come to see it as a critical business-planning tool.

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Is building a decent financial model time-consuming? Absolutely. But it solidifies your thinking and ensures you are focusing on the right things. And what could be more time-consuming than continuing to work on a business with no real idea of what you want it to look like in the future, and no real idea on how to get it there? Aiming for “growth” is not enough – you need to know the “how”, the “what”, and the “by-when”, line-by-line.

As author Alan Lakein said, “failing to plan is planning to fail”. Even if you never show your financial model to anyone outside your business, the exercise of putting one together is one of the most valuable investments an entrepreneur can make.


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About the Author

Nathan Rose is the founder of Assemble Advisory, a consultancy for equity crowdfunding. We help busy company founders get their information memorandums and financial models in order, and provide advice on structuring a successful equity crowdfunding campaign.