Not having a solid financial model can (eventually) wreck your venture. We know, you know … So, when you think about a financial model, you might think of a few numbers on an excel sheet, but unfortunately: A solid financial model is a bit more complicated than that. In order to get a clear and realistic view of your current situation and the future of your business, you need a well thought out financial model. What kind of formula will help you take the fast lane without crashing your venture in the first years?
Want to make it as a start-up? Your financial model is a crucial tool for your success. It’s important to show your investors and partners that you have a clear idea of where you are headed. Especially as a business in Life Sciences, Clean Tech or Deep Tech, the financial model will help you grow your business. For a start-up company it’s extremely important to create the right basis, supporting the setup of a strong and reliable financial backbone.
Six reasons why you need to get your financial model straight
Here’s how your financial model will help you building a successful business:
- Besides just writing a few numbers in a excel sheet, a good financial model forces you to think clearly about your assumptions, growth & milestone planning, cost budget and risk factors.
- Quantifying your business plan and model provides you with business case validation. It is a way to prove you are able to grow into a viable business. Plus performing scenarios help you to anticipate on situations that don’t go according to plan (they usually don’t).
- A solid financial model is key in your fundraising process. Next to the pitch deck, it is one of the main documents for making investment decisions for investors. It is crucial to show them that you understand key cost drivers and revenue drivers of your company. It can keep them interested – or not if your financial model is not up to scratch.
- Besides investors other stakeholders (e.g. banks, grant providers, supervisory board) also see your financial model as a critical information piece. It tells them how the company is performing, spending money and what the most recent outlook is.
- A financial model promotes financial awareness and diligence within the company. It helps to be mindful about your resources and make sure your start-up reaches important milestones before prematurely running out of cash. Also, it encourages ownership and responsibility amongst budget owners (e.g. departmental managers, project managers).
- During fundraising it is a tool to substantiate the amount of funding you require (capital ask) and how you are going to spend it (use of proceeds). If necessary, it can also help you to size the different tranches of milestone-based financing.
How to gain more insights?
In the end, your financial model is a display of your ambition as a founder and your understanding of your own business. However, we understand it can be tricky.
