TRC 019: Think you don't need a financial model?Sep 28, 2023
Read time: 4 mins
I have always found this a strange thought.
That early-stage financial models might be as effective as, well, a chocolate teapot.
I get it, the only thing you can guarantee about a forecast is that it will be wrong.
But unless you are very deep tech or far on the science side of venture, where a product launch, let alone revenue could be many years off, you really need to have one.
Let’s look at why.
Six Undeniable Benefits of Financial Models for Startups:
- The Inevitable Question: During your capital-raising ventures, rest assured, a potential investor will quiz you about your numbers. A prepared response beats a stumbled answer any day. Beyond instilling confidence in investors, it showcases your commitment, thoroughness, and the depth of your vision.
- Business Soul-Searching: Think of crafting a financial model as taking your startup for a romantic evening. It helps define your business vision, clarifying your short-term goals and long-term aspirations. Are you aiming for the galaxy with massive revenues or are you content with a smaller, polished gem? Furthermore, it encourages internal alignment, ensuring your team shares a singular goal.
- Commercial Savvy: Delving into these figures can enhance your business acumen. Unearth the financial mechanisms that set your startup on the path to success - from pricing to growth metrics and staffing to operational costs. This deep dive helps foster a proactive approach, helping you anticipate challenges and identify opportunities for innovation and differentiation.
- Plan B Ready: Forecasts, by nature, come with their share of unpredictability. A comprehensive strategy reveals potential hitches, ensuring you’re always equipped with an alternative. This adaptability not only ensures resilience in the face of challenges but also demonstrates agility, a key trait investors look for in startups. Every battle plan changes.
- Cash Flow Conundrum: Underestimating cash flow? A common pitfall for many founders. But with a well-structured model, you’re effectively gearing up for a financial marathon. The comprehension that you build by constructing a model ensures timely interventions and safeguards against over-expansion.
- Strategic Decision-Making: A potent financial model isn’t just numbers; it’s a compass. Whether it's allocating resources, spotting cost-saving opportunities, or appraising potential collaborations or takeovers, it guides your choices. With its insights, you can optimise your product offerings, fine-tune marketing strategies, and even forecast potential industry trends.
But here's a crucial note:
A financial model, however precise, is more like a navigational chart. It points the direction but won't rev the engine.
The drive and enthusiasm for execution will always be key.
You can sketch out the path, but the journey's success rests on passion, teamwork, and adaptability.
Financial models, invaluable tools in the startup toolkit, an ace up your entrepreneurial sleeve.
And never listen to anybody says you don’t need one to raise from investors.
You just don’t want to find yourself in a position where you don’t have your numbers to hand when asked.
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