A simple spreadsheet model can provide the financial clarity you need as a startup Founder.
As a Founder, you wear many hats. And of all these hats, I’m guessing ‘Finance Analyst’ is your most avoided, least favorite, or both.
Startup Founders, especially those with technical expertise, typically do not have a great deal of experience with financial modeling.
But cash really is king - it is the oxygen that keeps a business alive. Therefore, having a solid understanding of your business’s revenue generation, expense structure, and cash flow is crucial, whether you’ve already hired, or plan to hire, a CFO. Remember, investors will require a solid forecast model, and they will expect you to have a thorough understanding of it. Taking the time to build this model right and thinking through the inputs and outputs is hugely beneficial. It will allow you to determine the biggest levers in your business model and also provide clarity around what you have control over (expenses) vs. what you don’t (revenue assumptions).
Luckily, everything you need can be achieved via a simple Excel or Google Sheets financial model. Although Excel and Google Sheets are wondrous tools capable of elaborate models with countless tabs, you don’t need all that. In fact, for this exercise, complexity works against you.
As a CFO turned startup Founder, I’ve worked with my share of financial models. And for your model, I suggest no more than three tabs: (i) one for the P&L model, (ii) one for your headcount assumptions, and (iii) one for your revenue build assumptions.
Your model should embrace the following three C’s:
Cash-based: There are a multitude of accounting rules that cover the complexities of how revenue and expenses are spread over time periods. Leave this to the accountants – your concern is cash. Your model should operate on a cash-basis, meaning revenue and expenses are clocked when cash changes hands. For any one-off items, simply leave a comment in the cell that explains the fluctuation.
Conservative: The model you create will be used to guide your business and to serve as a base for important decisions. Critically, it represents your most accurate view of cash runway and the levers available to you to extend it. Accordingly, it must be credible and based in reality, which means practicing conservatism every step of the way. Your model is a tool that is supposed to predict (with as much accuracy as humanly possible) what will happen over the next 12 to 24 months. It is not a ‘dreaming’ or ‘best case’ exercise so check yourself if you feel you have veered off the conservative path.
Categories: QuickBooks and other accounting systems provide default categories for bookkeeping – do not use them. The purpose of your model is to match your actual operations as closely as possible. Create your own categories using your business as a guide. The closer the model reflects your business, the more effective it will be. For example, QuickBooks lumps software licenses into “Office supplies and software”. Would you want your tech stack expenses lumped together with your coffee and paper costs?
We’ve covered why you need a financial model, and also what it should (and shouldn’t) look like. Check out Part 2 of this series, where we jump into the ABCs and 123s of creating your startup’s first financial model from scratch.