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The financial model for a start-up is an exercise in creativity and forward-thinking. It’s an opportunity for entrepreneurs to let their imagination run wild, finally voicing their visions on paper. As startups are generally risky investments, the financial model is a tool that helps investors evaluate the venture before committing funds. The main purpose of the startup financial model is to show investors that your company can reach profitability within a reasonable time frame and make them enough money to justify their investment.
Importance[change | change source]
Financial modeling is an integral part of the startup world. You can use models to predict future growth, understand the impact of certain decisions, and help raise funding. It's also a great tool to see how sensitive your business is to certain assumptions. You can change certain inputs to see how they affect your bottom line or different stages in your model. Models are also good tools for learning about new industries and understanding valuations (if you're looking at acquiring another business).
Types[change | change source]
Financial models are mathematical representations of a financial situation. They can range from simple to complex, depending on the purpose and users of the model. Different model types are appropriate for different purposes, such as long-term strategic planning or annual budgeting.
A company may use several different types of models at the same time. For example, a company may have a long-term strategic plan that it uses to inform its capital investment decisions, but it will also create an annual budget model to plan out how much cash it expects to spend and earn over the course of the year.
Examples[change | change source]
- 3 Statement Model
- DCF Model
- Industry-Specific Model
Financial modeling for startups[change | change source]
Financial modelling for startups is the creation of a financial representation of a startup business. It's used to forecast future cash flows and profitability.
Financial modelling is often used to assess a company's current financial health, its valuation and its potential for future growth. Financial modeling for startups is often used to prepare a document known as a pitch deck. This document is presented to investors and contains information such as: the company's business model, its target market, how it will make money, founders' backgrounds and its revenue projections.
A financial model is not complete without a full set of business assumptions that make up the model. These assumptions are typically broken down by revenue, cost of goods sold (COGS), operating expenses, depreciation and amortization (D&A) and capital expenditures (CAPEX). The process of building a startup financial model is usually referred to as financial modeling.
References[change | change source]
- "Financial modeling". investopedia.com.