Last version published: 21/06/2017 10:04
Publication number: ELQ-92057-4
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How to Create a Financial Model for Your Startup - Guide
Step by step guide to making a financial model fit for your startup.
Introduction
Though a standard startup financial model template can be an easy way to create a financial model, it may be hard to use it for a business of your own.
Why is that? Each startup has its own necessities. For example, internet ventures are highly reliant on web traffic, while physical stores are rather reliant on foot traffic.
The solution to this is creating a startup financial model, using Microsoft Excel. Once you create your own worksheet, editing it for your own needs will be greatly facilitated.
From the moment it’s made, the template will be uniquely for your startup.
You may outsource the creation of this unique file. However, it is preferable if you’re the one creating it. All in all, you’ll be the only one who knows your business to its greatest detail.
Benefits of this guide:
• Teaches you the basis of creating a financial model for a startup business. Introduces key concepts needed to create a working model.
• Online methodology with detailed step by step explanation on how to create an excel model.
• The steps are based on a sample financial model for startups that you must download. Each step will enable you to know how the sample was made.
Screenshots are also available to help you visualize the lessons.
• The sample model does not fit for all business. The main objective is to duplicate the sample, but instead to work up your knowledge as to how you can translate your organization’s operations into a financial model.
If you’re already too excited to make your own model, do contain it. Before designing a financial model, you will need to keep some tips in mind. You will find these as the first step in your online methodology.
- Step n°1 |
Tips on how to create a flexible startup financial model template
Plans cannot foretell exact future. After all, plans are just subjective expectations. In other words, always expect different possibilities. Startups are volatile; there would be a lot of changes.
These possibilities should be contained in your financial model as well.
You must know what variables will affect your financial model. This helps you identify which cells should need manual inputs. All changing variables must be on cells that can be manually inputted.
Your model must be easy to modify. For example, if you change your Sales assumptions, it will take only a few manual inputs; all computations will work automatically. There’s no need for you to recreate each financial report.
To do this, have a separate Excel tab for all your assumptions. This should include all factors that you expect will change. These could be the Number of Units Sold, Price, cost of borrowing money, Depreciation rate, Days Sales Outstanding, Days Payables Outstanding, Days Inventory Outstanding, Planned Fixed Asset Acquisitions or even Tax Rates.
Cells should be properly labeled. This does not only mean that the cells be properly named as to what they are representing. The creator should also clearly indicate which cells needs manual inputs, and which cells do not.
For proper labelling, use legends.The best way to do this is by using colors. For example, you can use light blue to indicate manual input, white for cells which must not be edited and yellow for cells which are results of operations of other cells.
- Step n°2 |
Introduction
To reiterate, the model we will be creating here is not a good fit for all startups. However, learning how it was made will give you a good idea on how you can create your own.
These are the tabs of our sample financial model:
1. Instructions
2. Assumptions
3. Balance Sheet
4. Income Statement
5. Cash Flows
6. Valuation
7. Funding
The spreadsheet uses colors as legends, as those shown in the picture.
Before we start creating a spreadsheet, you should survey first your needs, or the needs of third parties that might use it. - Step n°3 |
Step 1. Identify not just your needs, but also of potential investors
Who are the possible audience of your financial model?
1. Investors
2. Creditors
3. And, of course, you…
As the owner, why do you need a startup financial model? Your first reason could be, you are needing a way to properly quantify the operations of your business. You would like to see what your income could be in the coming years. Moreover, you want to know the current valuation of your startup.
How about the potential investors? What could be their possible needs? First of all, they want to know the profitability of your startup. They want to know rates of return figures such as the IRR. Of course, if they are going to invest money (as well as time and efforts) so somebody else’s business, they would like it to be worth it all.
The creditors on the other hand, would like to see if you will be able to repay loans on time or not. They would like to see if the profits of the business will suffice to meet maturing obligations.
Furthermore, they might want to see if the founders have sources of cash other than the regular income of the business, just like saleable assets.
All of these needs should be the foundations of the model you will be creating. That financial model should be structured to meet the specific needs of intended users.
As part of the creation process, list down all the possible needs of you as the owner, and of the potential angel investors / venture capitalists. Use these needs to create an idea map of your financial model.
As to the time frame projection of financials, don’t go too far away. Three years will do. After all, the operations of startups are highly unpredictable. We rather focus on the medium term estimates rather than on long-term ones. - Step n°4 |
Step 2. Create an Assumptions Tab
The Assumptions tab, as the name suggests, will contain all the assumptions that will govern your whole financial model. This feature will allow you to play on the figures. For example, you can see the different income statements at differing levels of price just by changing the value of a cell or two.
In other words, this tab will allow you to make your model flexible.
How will you know what items must be included in your Assumptions page?
The answer will depend on your idea map. Based on your plan, what inputs do you need? All these values must be included in the Assumptions page. Remember, in a good financial model, no inputs are entered twice.
For our sample financial model, we had subdivided the inputs into four major areas you can find it under the Assumptions tab
