F-Cube Series – Finance Fundamentals for Founders – Financial Modeling (Part 1) – What is a Financial Model

A financial model is a roadmap for your business. In order to make sound financial decisions, it is important for businesses to have a financial model in place, built and customized for your business.

The financial model is a tool that allows businesses to predict future cash flow and income. It lays out your assumptions about future revenue, expenses, and helps you track your progress towards profitability. There are many different types of financial models, and each one is tailored to meet specific needs of a business; from the simple cash flow statements to the complex multivariable, driver-based projections.

If you are a founder and are looking to prepare a business plan, then you might need to show a financial model to your investors. Once the funding is secured, operational monitoring of financial performance, analyzing and taking timely actions based on cash flow trends, upcoming increase in staff or marketing costs, increasing supply based on expected revenue and many more actions become feasible using a financial model.  No matter what type of model you create, it’s important to make sure that your assumptions are realistic and that your numbers add up. The typical financial model comprises the following:

• Business Model Input drivers for Revenue, Cost of Sales and Profitability Forecasting
• Three financial statements – Profit & Loss, Balance Sheet and Cash-flow Statements
• Operating Expenses, Capital and Tangible & Intangible Asset Forecasts
• Financial Statement Analysis and Ratios
• Business Specific Key Performance Indicators (KPIs)
• Unit Economics Projections

While these are the basic aspects of most financial models, you may also find a Budget vs. Actual Variance Analysis, Common size analysis, Cap Table and Scenario Analysis functionalities built into some models. (P.S. Fynmodels offers some of these in our Standard Model.)

Financial Models help entrepreneurs, businesspersons and investors understand the potential performance of a business. A well-crafted model can give you insights into how changes in revenue, costs, and other drivers will impact your bottom line.

If you’re not sure where to start, there are plenty of resources available online and in the Fynmodels Portal, or you can consult with a financial professional. Creating a financial model is an important step in starting any business, so don’t hesitate to get started today!

F-Cube Series: This is part 1 of a 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