5 Reasons Why Startups Need a Financial Model

A financial model is a startup roadmap of your business. It helps you chart your cost and revenue projections at the beginning of your business and in the coming years. It will also aid you in understanding the cash flows. 

Here are the five reasons why startups need a financial model. 

  1. Insight of your business model. Startup businesses need a financial model that will help them think through all the factors that may affect their business profitability. It will also help assess staffing and professional service requirements up to projections of sales and marketing costs. Having this insight can highlight the business’ strengths and weaknesses that add valuable information use to improve the business model.
  2. Help you understand business growth. By inputting assumptions on your startup financial model, it is evident that you will spot opportunities and potential pitfalls along the process. You may find a channel to assess costly decisions and go for safer, conservative actions that would help thrive your business undertaking.
  3. Attract and satisfy investors. This financial model exists to help you have a clearer vision of your financial position in achieving business’ goals. Having to know and understand through the numbers will let you show to your potential investors the standing of your business. The points of financial projections are to tell you the opportunity drawn, resource requirements, market forces, milestone achievements, and profits. When you have laid this clearly, it will attract investors to fund your business and eventually satisfy them with your reliable assumptions. These investors include banks, lending companies, angel investors, and other individuals ready to pull out their funds to invest in your company
  4. Clarify your decision-making process. Short term and long term decisions help you better understand your goals, especially allocating your expenses, hiring staff, assessing product development, and other important decisions. It is a crucial part of a startup business, for this will affect your short-term and long-term growth and plans to achieve profitability. 
  5. Test your knowledge of the business. You may be new to your proposed undertaking, that is why you need to build a useful model to help you gradually achieve your target. Having a financial model is the chance to demonstrate it to your organization, as well as to your investors that you are confident and knowledgeable of the process in building your business.

Understanding the bigger picture of your financial model helps you put together the costs, revenues, cash flow, profit, and loss statements to let you see the more precise projection of your business. It will also aid you in tracking your growth upon the undertaking of your business. Many startups find this model realistic and inspiring milestones for the company. To further help you with how to build your financial models, you may visit eFinancialModels. It has an extensive list of startups businesses’ financial model templates useful in making one for your proposed project.