Your entrepreneurial bucket list is not complete if you never create a financial model — and here’s why
I dare you to create a financial model and give your business ideal a real chance to survive
“Cool idea, but how do you plan to make money?”
If you are an entrepreneur with an idea and start talking about it with people to learn how they feel about it, most probably you have heard the question above several times.
Common wisdom in entrepreneurship 101 is creating a business plan (written as a text document) and a financial model (as an Excel file). My focus is on the financial model because that’s the hardest part: you cannot create it without writing first the business plan, since you need to research and understand the customer, the market, the cost drivers and all aspects surrounding your business idea.
BUT many entrepreneurs, after the big effort of writing the business plan, they feel that’s all they need and skip to the pitch presentation. That’s, in my opinion, a huge mistake.
No matter if you are bootstrapping your company or seeking public or private funds, everyone will ask you for the numbers — and you should definitely ask them to yourself too. And still, most founders hit a wall when trying to communicate their mental math, or even when trying to sit down and come up with a structure.
Let’s face it: creating a financial model never makes it to anyone’s bucket list.
Today, I’m not only daring you to add it to yours, but also I’m going to help you to cross it off.
There’s a ton of tutorials out there on how to create one, my favourite ones being “10 first steps to create your own financial model in Excel”, “Financial Modelling for Beginners” plus the step-by-step guide, or this other tutorial on how to build a financial model with its Excel templates.
(Just to name a few — if you know other great resources, please add them in the comments.)
I know what you are thinking: only the prospect of opening an Excel sheet and sit down for hours without even knowing what to add to it is really not appealing. But years of experience tell me, though, that by going through this bitter step, you are giving your idea a real chance.
There’s nothing else that will give you more clarity about the resources you will need and for how long they will last you, and about the reality that if you increase numbers on one side, you reduce your timeline on the other.
Once you’ve researched and learned how to create a financial model, you’ll be hit with many uncertainties and your lack of motivation will grow. One thing is the theory, the other is practical terms.
As someone who has made a career of creating and iterating around hundreds of business models over and over again, I want to pave the way for you to start your company with a solid ground. I’m sick and tired of seeing great ideas and entrepreneurs never making it just because they skipped to the fun part without going through the boring one.
First of all, no matter if big or small, your company will need a financial plan if only for the sake to take hours and days to think everything through and find the blind spots you are not seeing today. A financial model is an opportunity to understand your costs and revenue drivers, plan your income and expenditures and, along the way, have a reference to check if you are on track.
This seems all very basic, but it’s crucial that you understand from start why after the business plan, a financial model is essential to you as an entrepreneur.
To put it simple: while your idea or vision, as long as they are enclosed in your brain, will surely crush it, most probably outside in the real world will be constantly crushed by practical and less idealistic minds. In order to win them over, you’ll have to translate what’s in your dreams into something they can understand and that makes sense in figures and in graphs.
So, when you finally sit down to figure out the numbers, keep in mind that your business model needs to be adapted to the target group you are reaching out every step of the way. For example, when presenting to bankers, go for a financial model that’s rather conservative, very descriptive and with wording they understand. But when going after VCs, you need to show a hockey stick: plan optimistically and show ambition. That’s what they are looking after.
I’m not saying you go out there and make up your numbers: always have one financial model that is made for yourself and your team. Use it to benchmark your activities against it and when approaching banks or VCs, derive what you show to them from your internal document and adapt it to them.
I know you’d like to see a real life example of what can be presented to a big corporation and, luckily, I’ve done several of those. I’ve achieved my favourite setup at my time at GERMANTECH DIGITAL, where when we prepare a business plan, we also add a financial model divided in several different sheets. Here’s an example of the template we follow — watch and learn:
1. INTRO
Use an intro as a navigation guide with explanations for the financial model.
2. DASHBOARD
Create the dashboard: one easy sheet to see the main information like Revenue, Clients, EBIT (Earnings Before Interests and Taxes), Marketing spendings, Staff and any other financial KPIs that are essential to your business.
3. INPUT
This is where you do most of the global inputs like taxes, growth rates, salaries, prices and so on.
4. MARKET
Include information about the market: how big it is, what its development look like and any other relevant insights. This information is used to calculate growth and have a sense for market share and validity of the revenue.
5. STAFF
Show that you plan for staff, at what point in the timeframe every position is needed and what are the costs.
6. EXPENDITURES
Add the calculation of all expenditures apart from the personnel costs, such as office, marketing and sales effort, branding, legal costs and anything that comes as cost of making business.
7. REVENUE
This is maybe the clearest sheet for most people: show the calculation of revenue, based on data from the market sheet and assumptions from experience.
8. P&L
This is basically the conclusion of all other calculations: the P&L (Profit and Loss) sheet brings the whole picture together.
9. LIQUIDITY
This sheet contains all information about the liquidity of the company. So cash in and outflows. In my opinion, this is one of the most valuable sheets within your plan. You can see here when do you need how much money and where is this cash coming from.
Please remember, the business might be profitable, but you still can be illiquid — meaning not having any cash to spend. And if your cash flow is broken, things will get rocky very soon.
And that’s it?
No, I’m not going to say: “Yes, that’s it, it’s as simple as that.”
Making business plans fit an Excel Sheet and become a financial model takes a lot from you and your idea. But what I’m going to say is that if you combine the tutorials I shared earlier with the example pictures I’m giving you, and you actually create your own financial model, you are in my eyes a true entrepreneur.
You stand a chance.
So I dare you to go full speed with your cool idea and make it truly fantastic on Excel as well. If you are up for the challenge and you are among the 5 first to complete it, I’m offering you my trained eye. Leave a comment with your idea and your financial model and I’ll give you my time and insights.
Why? Because I truly want to be the first to believe in your idea, and I can only do it if the numbers are right.
I’m part of the GERMANTECH DIGITAL team and we are experts with startup and corporate expertise, offering “Innovation as a Service” and building start-up companies with your corporate organisation in 100 days. We ❤ challenges.
