F-Cube Series – Finance Fundamentals for Founders – Financial Modeling (Part 5) – Use-cases of financial models

In part-4 we saw the types of financial models that are widely used in strategic or business finance functions. Let us now go through a couple of real-life scenarios where such models came in handy. 

How an Annual Financial Planning & Budgeting Model helped a B2B Saas Co

An early-stage B2B SaaS company required a detailed financial plan immediately after their initial round of venture capital funding. Most B2B startups fail due to lack of focus on unit economics or insufficient market size for their target segment. The main reason for this is that most founders do not have deep enough experience in business planning or accounting to be able to develop a solid financial model. A detailed Financial Planning & Analysis model is most suited in this scenario. 

This involved thoroughly understanding their core business functions and how they made money. The modeling involved identifying types of customer personas targeted, expecting pricing and number of expected seats per customer. The model detailed key cost components such as Product Development, Dev Ops, R&D and Administrative and Operating Expenses. Based on peer company research, assumptions on Saas Metrics along with its rationale were also made into the model. This provided significant visibility on expected Customer Acquisition Costs (CAC), Churn Rate, Pricing Structure, Number of Seats per Customer and so on. 

The model, with its monthly operational clarity on how to tightly manage costs and expenses at a pre-revenue stage, gave an accurate picture about how much money was needed in order to achieve profitability at various levels. This was achieved 12 months in advance of the next round of funding.  

How a Business Plan helped a Biotech Company raise funding

A Biotech company was looking to raise Series-A funding after reaching over $1 million in revenue to fund its growth initiatives. Over the course of their last round of funding, the company had narrowed its business stream to focus on just three verticals. A business plan model justifying the funds to be raised and the growth story for investors was needed. 

The top-down approach helped forecast the equity funding and working capital requirements at an annual level over a three-year period. Unit Economics involving the Lifetime Value (LTV) and Customer Acquisition Cost (CAC) were calculated using the model. A cashflow based valuation for statutory purposes was built and attached to the model. The potential dilution scenarios with Capitalization Table for investors and Shareholding information including founders, existing investors, ESOPs was an important outcome as well. 

As the above use-cases show, financial models are used for a number of purposes in the startup ecosystem. They can help you forecast your business, identify potential risks and opportunities, or even provide insight into competition. The financial model type that is best suited to each situation will depend on many factors such as the industry space it is being applied to and its complexity level among other things. If you need help determining which model is best for you, connect with us!

F-Cube Series: This is part 5 of 5-part series of blog posts

1. What is a Financial Model
2. Why use a financial model
3. How to create a financial model
4. Types of models in finance
5. Use-cases of financial models