Guide To Financial Modeling for Start-ups
Are you a start-up worried about your finances? Are you worried about your money management? Are you looking for a sustainable business? Are you looking for funding? Financial Modeling is the answer to all the above questions.
Let us help you understand what is Financial Modeling and why is it important?
In simple words, Financial Modeling is a step-by-step process wherein any company is represented financially by computing calculations. It practically covers all the financial aspects of the company. Financial Models helps the board of management to know the present and forecast the future financial performance of the company. There are numerous types of financial modeling.
Why does modeling play a vital role for start-ups? Let us check out below.
- If you want to know whether your business is economically viable or not, then with the help of financial modeling, you can check the sustainability of your business. Further, if you build with different scenarios (versions), even better, you have prepared yourself for the future. For example, if you launch six months later than the date decided, then it will help you anticipate your cash flow, money, and profitability will be affected by the duration.
- Second, the important reason is your investors would like to know about your financial goals and plans. Whether, they are angel investors, venture capitalists, banks, or any other, all will ask for your financial modeling. Hence, you will require foolproof financial modeling as per your business requirements.
- You will have to inform your shareholders and yourself as to how are you planning to spend the money? What are the targets of the company and how will you achieve them? You will have to update the shareholders, how will you spend their money? For all the above requirements, a start-up financial model template excels will suffice your purpose.
There are innumerable financial model templates available online. There are two primary methods top-down forecasting and bottom-up forecasting. Let us understand each one of them.
Bottom-up Forecasting
This approach is less dependent on external factors, i.e., the market. It is primarily dependent on the company’s internal data such as sales data, a company’s specific internal capacity. It starts with a micro/inside view and then moves forward for a macro view.
For instance, let us consider an e-commerce platform and one of its primary marketing strategies is online marketing. Their online marketing includes advertising the company's products on LinkedIn. With the help of LinkedIn, advertising tools, you can know the costs per click and the approximate number of visitors it can attract to the website. Hence, the company will get to know the budget and a good idea of potential sales.
Therefore, Bottoms Up Forecasting helps you to know the realistic targets of your company and also think about the ways to spend your resources.
Top-down Forecasting
In comparison to the Bottom-Up Forecasting, this approach works from a macro (Outside-in perspective, then progresses towards a micro view. It helps you to decide a forecast on the basis of the market share you are planning to forecast within a set timeframe.
A useful tool is the TAM SAM SOM model. This model captures the market size on three levels TAM – Total available market, SAM- Serviceable available market, and the SOM – Serviceable Obtainable market.
We hope that the above piece of information helps you understand the financial modeling in a simpler form.
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