What is a startup’s financial model


What is a financial model for a startup, and why is it necessary?

Financial modeling is an important startup planning tool that allows you to determine the feasibility of launching a project and attracting investments, the company’s efficiency, and the development strategy’s correctness. The absence of an economical layout of a business is fraught with negative consequences of varying severity – from unreasonable and unreasonable costs to the complete failure of the idea.

The financial model shows the current state of the company and the expected course of its development. I understand that there may be resistance: how can I know the future? And it’s true, and no one can predict what will happen tomorrow. But building a financial model will give you a tool to understand the strengths and weaknesses of the company and ways to optimize costs and increase profits.

And for potential investors, the financial model will help determine how much the founder understands his business and what goals he pursues.

Startup financial model: concept and types

For planning purposes, two forms of the financial model are commonly used:

  1. A financial plan of income and expenses (Profit and losses – P&L) – forms a startup development strategy and is built on an accrual basis (that is, accounting is not related to the actual movement of funds but to the date, the service is provided, the transfer of products, and so on).
  2. The cash flow statement (CF) implements cash flow management and planning.
  3. Most often, at the initial stage, it is enough for financial projections for startup to have a cash flow statement and plan based on it. This report is an excellent indicator of business performance. And helps the founder avoid cash gaps and predict the moment of attracting investments. I won’t say it is without exception, but some investors use these indicators as criteria for making a decision. The calculation of these indicators is not the topic of this article, but if you want to figure it out, the planned CF will be a good basis for these calculations.

The founder will need to expand the reporting and planning system as the company grows. Then, P&L will be displayed with the capability to calculate the project’s revenue, profit margin, break-even point, and payback.

Why else do you need a financial model?

Startup financial modeling is used to:

  1. Justification of the company’s concept – the layout demonstrates the sources of income and costs, market size and other indicators of the organization’s activities. The model facilitates a more thorough comprehension of the company’s internal and external processes.
  2. Development of the company’s strategy – the layout shows the strengths and weaknesses of the company, the main economic factors affecting business growth, and focuses on KPI. Analytics allows you to optimize and increase the efficiency of activities and quickly respond to market changes.
  3. Benchmarking – comparing the company’s results with the indicators of successful competing organizations to improve their performance.
  4. Forecasting – analysis of the income and expenditure part gives an understanding of what volumes the business will start to make a profit. That is, the break-even point will be passed. The plan shows how quickly a startup spends money and whether these costs are justified when it is necessary to conduct an investment round.

Once again, the goal of the financial model is not to guess the company’s future but to understand a startup’s business processes and the factors that affect its growth. Since the layout is based on hypotheses, it needs to be updated regularly (when actual sales figures, revenues, costs, and so on) appear. In this instance, the prototype serves as the foundation for deciding the accuracy of the selected strategy and, if required, for revising it.

Principles and characteristics of building a business model

The financial model of a startup is based on a business model. Initially, it requires a description of the target audience, customer acquisition processes, product features, and receipt.

It is preferred to follow the guidelines when developing a model for a startup:

  1. Be as flexible as possible – indicators that require changes should be listed on a separate line (for example, the price of a product). A feature of the financial model for a startup is the regularity of deviations from the plan, while the assumptions made are easy to correct. As a result, related layout elements will also change due to the action of formulas. It is important in current activities to replace assumptions with the received actual data.
  2. Your financial model should be as simple and understandable as possible for you.
  3. It is useful to construct a realistic model to examine the industry’s average identifiers. Such an industry analysis will help the founder prove to investors the objectivity of the created layout.
  4. The aspiration to present an idealized image of the organization is common error startups make when constructing a financial model. However, this results in substantial variations from the plan in practice. When constructing, it is essential to consider both optimistic and pessimistic scenarios and to account for reserves. For example, it makes sense to allow 5-10% more for operating expenses and thinks about an additional option in the sales report if they are half as planned.

For more information you should contact with business plan consultants.

How to start building a startup financial model

You need to gradually build a startup financial model – “from simple to complex.” Initially, you should create a basic business layout and establish links between its elements. Then, as the startup grows, supplement the model with indicators corresponding to the stage of development.

The main stages of building an economical prototype of a business:

  1. Analytics and structuring of income.
  2. Compilation of expenses.
  3. Analysis of operating activities.
  4. Adding additional indicators based on the startup’s characteristics and the development stage (taxes, loan interest, and so on).

You can build a model yourself or entrust the analysis to professionals.

In the company’s early stages of development, the founder is quite capable of doing it himself . Creating a table with the necessary economic indicators in Excel or using ready-made templates. This will allow the founder to delve deeply into business processes, control and effectively manage a startup. And show investors an “understanding” of their project and development strategy.

In our opinion, the best option for a startup is to create a model on their own. Thoroughly delve into business processes, and give it to a professional for audit.


The prerequisites are the foundation of the financial model, and their change affects the final result of the company’s activities (profitability, payback, and so on). They allow you to predict different options for the development of a startup and refine the layout.

Prerequisites may include product timelines, sales funnel, marketing tools, contractual terms (such as prepaid or postpaid work), discount rate, loan rate, dollar exchange rate, markup, inflation, etc.

How to evaluate income

The model reflects:

  • all sources of startup income;
  • sales plan;
  • sales market analysis;
  • total incoming cash flow;
  • cost of sales.

The outcome is the description of operating profit; it ought to be encouraging, at least in the anticipated scenario. But the company must go into positive operating activity in the long term. Otherwise, it will become bankrupt or require new investment rounds.

When determining income, it is important to consider the product’s features. For example, if an online service is being developed, it makes sense to break down the number of subscribers by rate. For example, set the premium to 10% on the regular plan – 90%. The characteristics of the product are also subject to seasonality.

That is, the income statement in the financial model contains both real numbers and planned ones. Therefore, the layout can only consist of a forecast at the initial stages of startup development. The following methods are used to determine income:

  1. “Top-down” – a startup needs to take an estimate of the size of the target market and multiply it by its estimated share in it (which the company will be able to take). For example, a niche has seven main competitors who occupy 70% of the market. Then the startup can indicate that it plans to own 10% in 5 years (70% / 7). To determine profitability, the share is multiplied by the target market assessment.
  2. “Bottom-up” – in this case, you should multiply the average revenue per customer by the expected number of customers. For example, if a business provides a subscription fee, its average value can be the average profit.

You can select one of the available methods to calculate the cash flow. Still, it is better to use both – display the total value if there are discrepancies (at the same time, it is better to adjust the indicators in which the startup is less confident).

Consumable planning

When developing a financial model, all actual and anticipated startup expenses are accounted for:

  • for the production of a product, including capital – for the acquisition and modernization of fixed assets (equipment, technology, real estate, and so on);
  • about the marketing and sale of the product;
  • Permanent – salary to the state, rent, payment of utility bills and so on.

Examples and Templates in Excel

Suppose a startup has not yet launched or is just starting its journey. In that case, the financial model looks as simple as possible and includes only basic elements (income, expenses, and their ratio).

For example, Start is planning to launch an educational mobile app. Before the MVP (minimum viable product) creation and the first sales, the founders formed a simple financial model to determine the feasibility of developing an idea.

For the first three months, the founders are busy creating the product, for which they attract IT specialists, reflected in the expenditure side. Marketing costs are minimal – the founders use free or low-cost demand analysis tools and promotion methods.

Financial model of the startup

Use a similar financial model template – fill in only the colored cells. The colorless ones contain formulas for the automatic calculation of indicators. For correct calculations, enter the costs in the table with a “-” sign.

After entering the market and receiving the first income. The project’s economics becomes more complicated, and it is advisable to supplement the financial model.

The first sheet of the layout contains basic questions about the startup concept, product features. Its value for the consumer, competitive advantages (business model). And key performance indicators (unit economics). The second sheet shows the dynamics of the company’s development over a certain period.

Summing up – life after the financial model

The main task of tabular structuring of startup performance indicators is to determine how profitable the planned project is in the future. On the other hand, if the project appears profitable. The layout will help determine the target values ​​needed to reach the break-even point and further growth.

Since the economic layout is based on hypotheses. It is natural to ask what life is like after its formation and whether it exists.

As a result, the financial model becomes biased and requires intervention.

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