So Why Do I Need a Financial Model?
Building a Financial Plan
First and foremost, your investors will require you to have a financial plan. Depending on their sophistication, they will likely spend a large amount of time analyzing your model and asking you a lot of questions about how you came up with your numbers.
So lets say you plan to finance the business from your savings account. Assuming you care about getting your money back someday, building a financial model will have several beneficial uses.
Financial Plan Benefits
- Building a good model of all the startup and running costs will help you determine how long you can run the business without revenue.
- Adding on a revenue model that predicts how revenue will flow into the company will help you predict when the business will start bringing in more cash than it uses on a month to month basis. This is called positive cash flow.
- As you begin to run your business and some of your assumptions prove to be inaccurate, you can update the model to gain a sense of your current situation. For example, if you expected $10,000 in revenue in the third month and you now know that revenue will not come in until the sixth month, reflecting this change in your model will quickly allow you to understand if you will have enough cash to make it through the extra three months. The same holds true if product costs increase, discounts run higher than expected or any one of hundreds of assumptions you have made in the financial model.
Financial models can be even more valuable once the business is up and running. The faster you can understand the impact of a change in your plan, the more likely you can leverage the opportunity or mitigate the risk.
Originally posted on startupmodels.com.