Basics To Construct A Financial Model For Your Startup

Can anyone carry out financial modeling? Yes, provided they know the variables, different types of traditional and advanced models, valid assumptions and the purpose. Another important question is why should you construct a financial model? The answer may be, as a part of your profession such as an accountant, finance manager, corporate financial advisor, investment banker, equity and market research, business valuation etc

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There are several courses inclusively and exclusively related to financial modeling. Some of them are offered by reputed and authentic educational centers and will help in molding you into a potential expert, however, real expertise comes from constant practice, learning, and experience. You can do your own homework by constructing models based on market data available in the public domain or real data collected from your own firm. It is advisable to always start from the most basic flat-line model and then progress upwards.

Two ways to start and simple steps to proceed

As a startup, the company needs a well-defined plan of the capital cost accountable, funds with them, expected expenditure and how long the available funds will help them to move forward. This is done by building a startup financial model, which determines the future operation of the firm. You need to know your cash and its flow for the future so that you get an idea of how intensively you have to call for investment and how to put your assumptions to lure investors.

As a startup, you can construct a model in two ways depending on the final purpose. Explaining with an example; your company aims to introduce a new range of cosmetic products in a new market and you need to attract investors for the same. Here, you follow a bottom-up method, notifying about the future plans and expansions regarding the product introduction with the current and future extrapolation of the company’s financial performance.

Alternatively, you have an almost specific fund figure to raise in a financial round and you intend to utilize this fund towards any company goal. With this fund, you can project the expected revenues, cash flows and profits in the futuristic model.

Five simple steps for the construction

  1. Gather and generate the resources for the startup model such as credible assumptions, income statement, cash flow statement, balance sheet and supporting schedules (capital assets, interest, debt etc) of the model.
  2. Carry out business valuation or discounted cash flow analysis and interpret the results.
  3. Perform sensitivity analysis of the model and also add the scenarios by changing the assumptions for risk assessment and planning.
  4. Present the model in the form of Excel spreadsheets including charts, graphs, and formulae.
  5. The final step is to confirm that your model behaves even under extreme stress and pass out of the audit.