3 Reasons Why You Need a Financial Model for Your Startup
Stop flying blind! If you are a startup founder without a long-term strategic financial plan, it's time to turn on your financial flashlight, especially in this volatile economic environment.
You need a solid financial model to...
It's not uncommon for startup founders to feel like revenue is growing, even though profit is not. Why? Because they do not have a healthy profit margin in the first place. Perhaps they are spending more on marketing to acquire customers than what their customers are willing to spend on the product. Perhaps they are offering more discounts than they can afford after taking into account all the indirect costs.
How much should you spend on marketing and how much discount can you offer? A financial model can easily answer all those big questions you haven't been able to wrap your head around.
Often I hear startup founders say, "I have so much to do but so little time!" The truth is, you don't have to do it all - you just have to pick the right priorities. Ever heard of the book "The 4-hour Work Week?" You can 10x your per-hour output if you focus on the 5% of work that generates 95% of your revenue.
But how can you know which 5% to pick? That's how a financial model can help. A financial model can help put some numbers next to your ideas, and present you with a clear financial blueprint. It can give you clarity on the business potential of each endeavor so that you can prioritize your energy on the 5% that can truly drive business growth and lead to results.
Want to raise money so that you can further scale your business? Whether it's an angel investor, accelerator, or VC, you likely have to pitch them your business plan and convince them to invest in you. Be prepared to get asked, "What is your Target Addressable Market (TAM)? What is your revenue growth projection? What are your gross and EBITDA margins? What is your LTV to CAC ratio?" ... Etc.
You need to convince them to believe in your business by clearly illustrating both its potential AND growth strategy. A pitch is much more convincing with a robust financial model containing multiple scenarios representing your current situation and future plans, backed by reasonable assumptions. A financial model can provide the essential due diligence that investors look for, and most importantly, give you ultimate confidence as you embark on your journey to pitch to the world.
Want to learn more about financial modeling? Book a free consultation with me today!