By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting

Building a financial model is a significant effort for every startup, especially for early-stage startups.

Projecting how the business is performing three or five years is almost impossible when there are too many unknowns and moving pieces.

The main purpose of building a financial model is not being historically correct in five years with the user base projections or revenues estimates.

The purpose of the financial model is also not to show your Excel skills or how good you guesstimate future expenses.

You also don’t build a financial model just to show that your startup’s revenue projections and KPIs will grow exponentially in the next years.

The primary purpose of the financial model is to force founders to think about different aspects of the business that they would never have thought about so early in their startup life. 

The secondary purpose of building a financial model is to create the infrastructure to allow startup founders to update their assumptions as the business evolves. It should also enable founders to reflect on their changing business model, revenues streams, and beliefs. 

In Finro, we work with each startup typically for three to five years between the idea stage and series B. In that period, we usually update the client’s financial model a few times.

Some updates are minor, like adding new revenue streams, expense elements, and some are large, like changing the user acquisition process or changing the business model entirely. 

This is the real essence of a startup financial model, to be a flexible, adjustable tool that helps founders plan, make decisions, and stress test different scenarios. 

It might not be a popular opinion in the consulting community, but for the financial model to be that helpful tool described above, you need to build it on that fine line between simplicity and complexity. 

A good financial model is simple to update and easy to follow. A good financial model shows some aspects at a high level while deep diving into other elements. 

Helpful financial modeling resources are here to learn more

From my experience, when over-complicating a financial model, it becomes useless and unusable quicklyt. When you invest the time and effort to build a financial model, you want that time to be well-invested into the future of your startup.

Therefore, make the financial modeling process count. Build a model that will last for a few years and add value to your business and decision-making process. 

How?

First, make sure you simplify the model as much as possible and build it with the reader in mind. When creating a startup financial model, assume the reader has no previous knowledge of the company, its business or niche, so make it easily accessible and easy to follow. 

Second, try to walk the reader through the user acquisition process, pricing, and revenues. Help the reader understand how the business will acquire users, how much it will cost, the main channels and how much revenue each channel will generate. 

Third, don’t guess what investors will want to see and avoid ROI calculations and different investor metrics. Every investor has its priorities and other ways to choose investments. Focus on showcasing your business.

Do you have other tips on building a top-notch startup financial model? Let me know in the comments below.