Financial management of a high-growth company can be as unpredictable as the weather. That’s why, at an early stage, you need to think about every potential financial scenario your business can find itself in. Optimizing your financial model is key.
A well thought out financial model gives you a clear and realistic view of your current situation and the future of your business. That insight into your business is crucial for success and important to show investors and partners that you have a clear idea of where you are headed.
Be sure your financial model includes all three statements: (1) profit and loss (P&L) statement, (2) balance sheet and (3) cashflow statement. A lot of entrepreneurs only show their P&L sheet, while cash is absolutely critical for making business decisions in the early days of venturing.
Don’t hard code numbers into excel. This will hamper the flexibility of your model and no one can follow this logic except for yourself. Making the key assumptions visible (a legend can be useful), helps investors to read your financial model.
Too often we see misalignments between the pitch deck, business plan and financial models. Preventing this saves a lot of time spent on damage repair and explanations towards investors.
A rule of thumb is to work from left to right and from top to bottom. For example, start with input assumption sheets, then calculations sheets, followed by output sheets. This avoids the famous ‘worksheet spaghetti’ where a reader is sent on a full scavenger hunt to figure out your formulas.
Make sure your financial model reflects the desired ambition a venture capitalist (VC) is looking for. Investors are looking for a growth plan that yields them specific cash-on-cash multiples and/or an internal rate of return (IRR). If this is not a realistic outcome of your model, it is vital to understand what is lacking in your business case.
This is the most diligent way to make sure your forecast is realistic. Especially top down forecasts have the tendency to overestimate revenues in the first years, plus they don’t reflect how you are going to drive that revenue.
Make an actual versus a budget analysis. This way you can see how you perform, whether your course of action needs adjustment and if your runway remains intact.
Too often we see projected annual revenues reaching 40 million euros, with still pretty much a start-up cost structure. A 95% profit margin may look attractive, but lacks credibility.
By now, you might understand the importance of a well thought out financial model, but you also might feel overwhelmed. Don’t be afraid to ask for some help here: We know its difficult.