The Importance of Financial Modeling
Updated: Nov 30, 2020
As a new entrepreneur, you naturally have innumerable tasks and responsibilities running through your mind, from surrounding yourself with a high-caliber team to generating new leads and sales. Financial modeling often falls low on the to-do list, especially for entrepreneurs lacking a formal financial background. Financial modeling, analysis, and overall strategy can be quite daunting to these founders, and understandably so. After building diverse solutions alongside startups across a multitude of industries, we have realized that too many aspiring entrepreneurs fall into this trap of neglecting financial strategy and modeling in favor of marketing, sales, and product development. While almost every business conducts some form of financial planning or budgeting, a proper financial forecasting model will propel your venture to the next level, not to mention giving you a much deeper financial understanding of your company’s KPIs and funding needs.
A sophisticated financial model will not only help you understand where your enterprise currently stands and its future trajectory, but it will greatly aid your fundraising pursuits and understanding of potential future business scenarios. Firstly, the evaluation of your idea as an economically-viable business rests upon sound financial modeling, taking into account key industry and business assumptions, projected cash flows, and the ultimate value of your budding enterprise. By quantifying your business plan, you can confidently make the determination that you have an economically-feasible company, or a dream unfounded in reality. Wishful thinking can be a double-edged sword, but numbers paint a stoic picture of your business which is both objective and measurable. As Lord Kelvin said: “If you can’t measure it, you can’t improve it”. This holds true in the world of business, and especially so in the brutal game of building a successful business from the ground up. In addition, modeling out future scenarios from optimistic growth to worst-case, will give you a clear, yet flexible, picture of your company’s future. This information is not only crucial for your management team, but for VC firms, angel investors, and startup accelerators. The fact is, these mavens of capital want to see that you have done your homework and your numbers are squared away. Without a financial model setting realistic targets, there lies a problem; investors will ask how exactly you intend to spend their sought-after capital, and whether or not you are performing as planned. As entrepreneurs, we need to have the answers to all of these questions and more. Detailed scenario planning offers the added benefit of understanding which business drivers are most impactful on your KPIs. For example, a subscription-based SaaS company will be heavily dependent on the growth of its subscriber base, and scenario planning will allow its CEO to understand just how responsive his KPIs are to changes in subscriber growth. This information is vital for expense management, hiring decisions, and overall business development. Armed with a robust financial model, you can enter the often-daunting fundraising process with the confidence and poise of an entrepreneur who knows both where his company currently stands, and where it is headed.
The Astral Consulting Group approaches every business case with a clean slate, and applies our unique framework to build a workflow to suit each client's individual needs. Our founding partners come from engineering backgrounds, and understand the importance of reasoning from the ground up. As such, we combine this "first-principles" style of thinking with a holistic growth mindset to evaluate each case from both the top-down and bottom-up. This creates a comprehensive process unique to each solution we develop, and gives our clients insight into both the granular details of their business and the high-level strategy and vision to propel them forward.