Top tips to harness your startup’s success
It is very important to make sure your startup uses solid financial modeling from Day 1. At The Startup CFO we are experts in guiding, managing, and counselling new startups on the best strategies to grow, expand and harness their success. Entrepreneurs can often become overwhelmed with the sheer quantity of workload and tasks involved in getting a new business off the ground, which at times can cause important financial and administrative activities to be neglected.
Financial modeling is the cornerstone for any early-stage or growing startup, mostly because it provides fundamental information for the business to reach its full potential.
Understand how financial modelling can make or break your business
Before exploring exactly what you need to include in your financial modelling, it’s fundamental that we take some time to review the key reasons for financial reporting and the cornerstones of a solid and evolving financial model. Financial modelling serves a key purpose for both your day-to-day tracking of results and progress, while also providing a monitoring tool for your team of directors and, where appropriate, employees. However, the scope of your financial modelling also goes much further and acts as a document to inform potential and current investors.
And you will wonder, what is exactly the purpose of modelling? Well, modelling does not only try to foresee a plausible future but also to report with an eye to the past. Accordingly, you need to consider these jointly with the main drivers of the business in order to build a great financial model.
It is surely a highly valued skill, as you may need to build a model that final users understand it.
While entrepreneurs need to have a full grasp on figures and may need to edit the model, investors are the individuals that will ultimately use your financial modelling and reporting to understand your startup, and to decide whether they wish to invest or not. For this reason, it is relevant that the model is simple, flexible, accurate, reliable and transparent, hence, we are going to delve into the parts that we need to consider while modelling.
Some tips for startup financial modeling
As a starting point, the structure must be consistent, it is essential to differentiate between inputs and outputs in a financial model, so each input and output can be easily distinguished. Not only in format but also in structure. A specific format for each type of number must be established, it does not need to be universal, but coherent. For example, parameters that can be modified must go in blue and calculations in black.
Moreover, the logical structure should place outputs at the top and inputs used to calculate under each output. As we will generally need to add a country or region as we grow, it is crucial that the structure can be easily replicated. This also means avoiding inconsistent formats or formats that we only understand without explanation. In case of doubt include notes.
It is also fundamental that your financial model has an appropriate and easy-to-read format. Excel sheets are free, so it is fine if you have auxiliary sheets that simplify calculations, store auxiliary numbers or help you with visuals. Still, it is better to avoid complex formulas if they can be simplified with auxiliary rows or columns.
Consequently, consider one goal for each sheet and always order the model in a top-down structure, both the sheets in the model and the calculations within the sheets.
For instance, you may include good covers or summary sheets for the relevant numbers an investor wants to see.
What is the difference between something well and something excellent in excel?
That question brings us to the next fundamental point, which involves ensuring that your financial modelling has a seamlessly solid structure that translates to different areas of your business and to your investors. When it comes to modelling, everyone has their own style, however, there are general and ideal principles. Nonetheless, the most important thing while building a financial model is robustness, thus, structuring in excel should be seamless.
It is easy to get a well-calculated result in Excel, but it is not that easy to make an excel “poka-yoke”, or in other words, bullet-proof.
We know that excel can get complex, and even though there are things that seem very logical now, we recommend not relying on your memory, and model everything for dummies, although there is a trade-off between the robustness and simplicity of formulas. As discussed above, the need to modify the model increases as the company grows. Therefore, it is essential for a financial model to be robust, as it will be much easier to change it in the future.
In that line, one of our recommendations is that each input only has to be once and linked to the point of insanity. In order to make it coherent, a good option is to use auxiliary sheets that will link information that applies to most of the model, such as the dates or information that applies to all the countries you are modelling. And last but not least, you will make plenty of mistakes in the process of creating a complex model, use as many CHECKS as possible.
Seek an external CFO and consulting service to enhance your strategy
Bearing in mind what we’ve seen so far in this blog, the importance of sturdy financial modelling simply cannot be taken for granted. At The Startup CFO, we draw on a vast experience of helping countless startups to effortlessly streamline their financial reporting, systems, and spreadsheets with the goal of offering them a failsafe service that builds on company success and takes their results to the next level.
We partner with our clients with the goal of working in synergy to get the best results, whether that’s through taking charge of reports, building financial models, analysing KPIs, guiding entrepreneurs as to the best financial information to present to investors when securing a funding round, or standing shoulder-to-shoulder with businesspeople as they network and explore their potential markets.
We also proudly provide online courses and tutorials to help you enhance your business know-how, and you can explore these further on our YouTube channel.
Get in touch and speak to our professional team to find out more about the services we offer to both national and international startups.