How to Build an Accurate Financial Model for Your Startup
6 min. Read
Last Updated: 07/30/2015
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So you have an idea for a startup that you're ready to pursue? What's next? How do you know if this idea will succeed and be able to bring in sustainable revenue? This is when having a financial model is a vital component for any startup's success. When defining an accurate financial model for your startup it's important to be realistic with the numbers and gather as many facts as possible. The more concise you are with your figures the more likely your business will be able to follow a successful plan. Don't worry; you don't need to know any complex math or business concepts, just these few quick tips.
Define your business model
Before building a successful financial model for your business you must first vet your idea. Ask yourself some basic questions about the product or service you're offering, your target market, the problem you're solving for customers, what kind of demand there is for this idea, and how much customers are willing to pay for everything.
Also, how long do you expect to be in research and development mode? When will you bring your idea to the market? What's your promotion strategy and how will you market this product or service?
To find out these answers, seek other experts in the same field, perform tests and surveys, review facts and collected data, and attend trade shows and other in-person events. In other words, you have to thoroughly define your business plan in order to create a successful financial model to go along with it.
Calculate startup costs
A startup is often an expensive endeavor, which may or may not be fully funded by your own capital. However, once your idea has been tested and vetted, you'll be able to move to the next phase: creating a financial model.
The first step in creating a financial model is to figure out how much money you'll need, and whether you can afford to pursue this idea further. Projected revenue is often much more difficult to quantify in the beginning stages of a business, so you'll want to begin by calculating the startup costs.
There are some realistic assumptions for expenses that will have to be paid, such as operating costs, employee salaries, customer acquisition expenses, and marketing costs. Other important startup costs to consider include:
- Insurance premiums
- Legal fees
- Office supplies
- Website and promotional designs
- Pre-launch marketing costs
- Rent payments
What do these projected expenses look like in comparison to your business plan, and other startups in the same industry? To get a more detailed look at startup costs, check out this calculator from The Wall St. Journal. By researching these answers you'll be able to hone in on a final figure for your startup's costs.
Track your revenue
The reason most startup owners come up with a new idea is to make money, so it's no surprise that tracking your revenue is one of the most important considerations when creating your financial model. What's the break-even point? How are you planning to monetize your startup's idea?
If finalizing a revenue model is step one, step two involves tracking your income, measuring results, and leveraging your idea so you can continue to grow and bring in more money. There are multiple ways you can track revenue while streamlining the process. One option is to do it the old-fashioned way with a simple spreadsheet or revenue-tracking template. Another more advanced way is to use cloud accounting, which can simplify the our accounting process, help you create detailed reports, and track your startup's income in an efficient manner.
As a startup owner, you don't have a lot of time so you want to leverage the time you do have most productively and cloud accounting can help you achieve this. If you don't launch your startup with a revenue model in mind, it will have a much higher chance of failing than if you find ways to track revenue and expenses.
Review your projections
Now that you have a basic business plan in mind, have calculated startup costs, and are tracking revenue, it's time to put everything together into a solid financial plan. Does the income you expect to make fit into the timeline of the business model? Are your projected expenses a lot less than you initially anticipated?
Take a look at the entire financial picture and work with it's seamless in your mind. Review your past, current, and future projections and then compare them to your goals and realistic expectations. This will allow you to create an accurate financial model for your startup and ensure it's on the right path towards success.