Simplicity Is The Secret Weapon In Your Financial Forecast

By Lior Ronen | Founder, Finro Financial Consulting

Building a financial forecast for a business can be a challenge. With so many variables to consider, where do you begin?

The starting point can surprise you.

It’s not where you think you should start.

Building a startup financial model, or any business financial model, should start by thinking of how to express your business idea most effectively through the forecast.

In any financial forecast, clarity is vital. A reader needs to be able to understand the business—how it generates revenues, how it spends its money, and how it expects to grow.

Burying any of these under mountains of unnecessary information and calculations is missing the entire point of a financial forecast.

Of course, you should include the details behind your calculations, but there's a limit to how many details the reader needs. Too many details may make the forecast difficult to understand and follow.

To help a reader follow your financial projections better, ask yourself if each new element adds something to the overall picture. If it doesn't, don't include it.

Why simplicity is such a big deal?

In a nutshell, it can help you keep the discussion focused and the fundraising process smooth.

For example, here's a true story about simplicity.

I recently saw some SaaS businesses use fairly complex growth models in their early-stage startup financial models to forecast future financial performance.

The most popular revenue models in SaaS business models are Sales Led Growth and Product Led Growth which artificially creates growth rates based on a narrow and partial set of assumptions.

Unfortunately, these models are usually better in theory than in practice. 

They can be hard to explain. It makes them counterproductive when presenting your business to potential investors or buyers.

The level of complexity in these models misses the point of simply presenting your business to investors.

When the conversation focuses on explaining the forecast method and not on the core issue—it misses the point.

But the downside of this over-complexity doesn’t end here.

The level of complexity also makes it hard to correct or update small details. To do so, you would have to build another layer of calculation on top of them, which will create more complexity.

These models typically focus on a narrow business segment, enhance it and ignore many others.

In real life, businesses take into account hundreds of interconnected relationships between different aspects of a company and thousands of mini-decisions along the way.

It’s a rabbit hole for small details that are meaningful for the models’ internal world but meaningless for the business.

Time spent on building these models could be used more effectively on other aspects of the company.

Do this instead

Think about how you will acquire new clients and reflect that in your model. Show your assumptions about paid ads, organic traffic, conversion, churn, demo calls, etc. You'll focus right away on the core business topics that matter to investors or buyers.

Remember that the goal of the financial forecast is not to be historically correct but to help investors or buyers to get to know the business. This task is complicated enough, don’t make it harder.