Financial modeling is used to make predictions about startups using Excel to create a mathematical model. It’s based on reasonable projections from historic records. There must be an understanding of the financial position to determine how much can be spent on launching and moving forward. Successes and failures, along with opportunities and investments can all be evaluated to ensure success.
It is not necessary to show every business detail in financial models but there does have to be a model that shows key assumptions that are useful in the planning process. Financial statements and market research from industry projections should be used when creating a financial plan for startups. Extremes can be survived by predicting them in advance.
Benefits of Financial Models
The three-statement model is the easiest to use for startups. The cash flow statement, balance sheet, and income statement are the only ones used in creating a financial model for the startup with this method. There are more advanced methods, but they are not always necessary or useful to startups. Three-statement models are good when attempting to raise funds and making decisions. Production costs, staffing, and marketing are just a few things that can be covered in these financial models for startups.
Predictions for Startups
Variable costs predictions are needed to determine the revenue needed to get products to market. Startups need to estimate how many units can be sold at what price and in what time frame. The goal is to ensure that there is enough capital to keep the startup going through the initial growth phase. It is important to know the cost of hiring additional employees and purchasing supplies while maintaining the budget.
Keep It Simple
Color coding the Excel sheet and keeping the formula simple will make it easier to use the model for your startup. The basics are all that you must know in order to make scenarios that will help you to make predictions for startups.