It’s much simpler than some “experts” would like you to believe
“Building a Financial model is as painful as having a child” – Pre-Seed, Edtech Founder
If the idea of creating a financial model makes you nervous, you’re not alone. Founders tend to think of financial models in terms of complicated spreadsheets requiring a PhD in finance to understand.
In reality, financial models for early-stage startups should be simple and easy to understand.
What is a financial model?
“Send me your projections….”
This simple request from an investor to an early-stage founder often causes mini-panic attacks. But answering it shouldn’t be nausea-inducing. There are three different elements of a financial model:
- Financial statements: Profit & Loss, Balance sheet and Cash Flow statements
- Metrics: Profitability, cash generation and growth indicators
- Charts & graphs
These can be used independently or combined. The trick is to know which to use for a particular audience or purpose.
Why do you need a financial model?
For two purposes: internal decision making and external-facing storytelling.
Many founders tend to prepare models only when fundraising. However, having one before even starting out is useful to ensure you build a sustainable business. Financial models are useful to understand business drivers & aid decision making.
The common assumption is investors will deep-dive into the details. However, at an early-stage, models should be considered more as storytelling tools. Models should communicate a clear vision for your company and show investors that you understand the drivers behind your business. For fundraising, there are three related use cases: financial projections slides in pitch decks, cap table calculations and for estimating funding needs and valuation. Read more about these here.
How to build your first financial model
It’s all about simplicity. First, decide on the purpose of your model and which elements you need. Then, you can either DIY it or pay an expert to build your model.
Many founders default to engaging consultants to build their first model. This is fine if you can afford the fees – up to £2,000- and the time it takes. But 99% of the time, the output will be overly complex and you will not be able to confidently present it to investors.
Even with a finance background, building models from scratch is time consuming. Caena’s automated financial modelling tool saves you loads of time and up to 90% of the cost of consultants so you can focus on what matters – growing your business.
In less than 30 minutes, you can generate metrics, charts and full projections for pitch decks, business plans and EIS/SEIS applications. In addition to financial modelling, you also get instant investor matching, so you can identify investors most relevant to your business. Visit Caena to get started for free.