How to Build a Comprehensive Financial Model from Scratch

Kruze Consulting Simple Startup Financial Model

This is a model that we’ve created and we provide for free on our website. We’re giving this away because there are a number of startup executives who want to build a simple financial model for their startup and who are comfortable enough with Excel to do this on their own.

And we also know that there are a large number of very early stage startups for whom hiring somebody like a Kruze Consulting to build a model just doesn’t make sense. This model is a very simplified version of one of the model templates that we use when we create financial models for our clients.

This free financial model has three main tabs. There’s a summary tab, there’s a graph tab, and there’s a model tab.

The summary tab is a high-level output that shows the income statement in cash and some of the KPI’s of the startup. We’ve seen that CEOs really like to use this to try to understand the macro level growth and expenses of their startups. And this is also the output that a number of our clients have used in their pitch decks when they go on to raise venture capital. We know this-this output works well because our clients have raised over 10 billion dollars in seed and venture capital. So, this is something that we really do believe resonates well during the fundraising process.

The graphs page is a graphical representation of some of the KPI’s of the startup like revenue growth headcount growth. Cash burn. It’s a really nice way to visually show what’s happening and the impact of the financial projections.

Finally, the model tab is the tab where all the magic happens. It’s in here that you can enter your projections, your headcount, your expenses, for things like marketing. It will output your cash and your cash balance in the cash balance section which is down at the bottom of this tab. Use the instructions tab for the detailed instructions and how to run the model tab.

We hope this free resource is helpful. We do offer financial modeling as a service to startup executives who are looking to get help when they’re putting together their financial model. So, contact us if that’s something you’d like to learn more about and to find out if engagement with Kruze makes sense.

Having a solid budget helps your startup hit its goals without prematurely running out of cash. A number of us here at Kruze Consulting have worked in fast-growing startups and we’ve compiled our tips on how to make this budgeting process work. The most important thing is you need to understand or have a vision of what your long-term strategy is and what you need to do to achieve those goals. You’ll want to bake your budget around what your strategy is, and the budget is actually the financial representation of that strategy. You got to make sure your team knows what the strategy is – what your financial goals are in terms of the revenue that you need to hit and the cash need to burn. Or what features need to be built and then you’ll want to start to pay careful attention to the key parts of the budget. So, for most early-stage startups, the biggest part of burn is headcount. So, you want to pay careful attention to your headcount projections over the coming year and because you’ll put this together with your team and your team will have their headcount projections. It will really help them manage their team in a particular know when they need to start recruiting so they’ll know when they

should be able to bring on additional heads. You should have a very strong opinion on what the revenue should be over the next year. So for example, if you’re a SAAS company you should know what your next milestone needs to be in terms of recurring revenue so that you can successfully raise your next round. And then you’ll want to build your plan and your budget around what it takes to get there. You want to be very careful around your burn rate. So you want to know how much money you’re burning so that you don’t prematurely run out of money. And then you’ll want to know what your monthly burn is at the end of the year like the burn of the exit with at the end of the year so that you can project your cash out date.

You want to make sure you’re not… You want to make sure that you run out of cash when you expect to run out of cash which hopefully aligns with you being worth more and raising more capital. Once you’ve got all this put together you can make sure that it’s carefully shared with your department leaders so they can come back and build their detailed budgeting plans with you. And also, they can very clearly understand what their goals are.

How to set up realistic financial projections for startups

Silicon Valley-style technology and biotech startups, by their very nature, have extreme financial projections. No venture capitalist wants to invest in a highly-risky company where the management has modest projections! But how should a founding team set up realistic projections that are still aggressive enough to explain the massive opportunity and get VC’s interested in investing?

Step 1: make sure the projections capture the size of the market; bigger markets lend themselves to bigger projections and estimates, higher growth, etc.

Step 2: if you are projecting big growth/big top-line revenue numbers, don’t forget to have big expenses to go along with them. In particular, we see time and time again founders who have projections of reaching $50 million or more in revenue with just a handful of employees. It would be very unusual to not have a lot of headcount growth to reach a huge revenue size. And VCs will doubt your credibility if you show them a company that has 80% pre-tax margins at scale – this is, generally, pretty unrealistic. So scale up your expense projections alongside your revenue growth.

Step 3: Focus on the assumptions behind your unit economics. Make sure these make sense from your target customers’ point of view. The average consumer can’t pay $50,000 per year for a new product; the average small business can’t either. So, understand the customers’ willingness to pay, and then how that impacts your margins and growth.

Step 4: Research similar companies’ business models and financial statements. For example, if you are in the social media space, look at Facebook and Twitter – see how their financial statements changed over time. The same is true if you are an eCommerce business – plenty of eCommerce companies have gone public and shared their data.

Step 5: Don’t model yourself out of a deal! If you are truly focusing on a huge market opportunity with tons of potential customers willing to pay for your product, don’t be so conservative that your projections don’t look interesting to potential investors, co-founders and employees.

Build a Dynamic Financial Model in Just 15 Minutes

How to build a financial model?

Here is step by step process to build a Financial Model: The initial step in building a Financial Model is to thoroughly understand your company’s operations, revenue streams, cost structures, and growth prospects. It involves delving into the company’s business model, competitive positioning, and strategic objectives.

What is financial modeling?

Financial modeling is the process of predicting and analyzing the company’s future performance, generally through spreadsheet software like Microsoft Excel. This includes: Financial models often help decision-makers, such as business managers or parties, in an M&A transaction.

How do I understand financial modeling?

To understand financial modeling, you must have good familiarity with accounting. Accounting includes the study of transactions and analyzing and presenting historical financial data. It is a subset of business administration and finance.

Why is financial modeling important?

The main goal of financial modeling is to accurately project a company’s future financial performance. Modeling can be useful for valuing companies, determining whether a company should raise capital or grow the business organically or through acquisitions. What is a Financial Model Used For?