Financial models are always wrong. Build one anyway.
Why build a financial model?
The financial model doesn’t matter; the thought process does. Financial modeling is more about the thought process than the model itself.
Why? To start, financial models are always wrong. But it’s important to create one anyway. I have created, modified, and delivered hundreds of custom financial models in Excel for a range of clients over the past decade, and learned a lot about how to create and use financial models in decision-making.
Creating a financial model forces an entrepreneur to outline very specifically how a business “works”: how a company creates their products, how users and customers find and use their products and how those processes create revenues and costs. The result, a set of operational metrics, financial statements and the “equation of the business”, is one view of a potential reality of the business. While any one view is inevitably wrong, by digging deeper and analyzing the key drivers and testing a range of assumptions an entrepreneur can create multiple views to help make crucial product design, marketing, organizational and strategy decisions.
Instead of focusing on the bottom line profit and net income, focus on the assumptions and key drivers of the business. Developing a financial model creates the type of thought and data that helps entrepreneurs figure out what they are betting on and how likely their bets will pay off.
Sounds hard? Financial models are easier than you think.
Resources for Business and Financial Modeling
Financial Model Excel Templates
- David Teten’s startup financial model
- Giff Constable’s freemium business model template
- Glenn Kelman’s financial model from Redfin
- Andrew Chen’s freemium business model
- Vince Scafaria’s simple Financial Model for a Startup
- Matthew Carroll’s sample financial model (explanation in detailed Quora thread)
- Mark Suster, valuation and sample capitalization table
- Michael Herman’s Startup Financial Model, $$ Excel Templates
- Christoph Janz, Financial Planning for SaaS Startups
Best Practices and Guidelines
- Great Quora thread on building a financial model for a web-only product startup
- Taylor Davidson, Financial Modeling For Entrepreneurs (PDF)
- David Teten, Best Practices in Spreadsheet Design
- Taylor Davidson, Why Financial Models are Easier Than You Think
- Nathan Beckord, Your Financial Model is a Work of Fiction; Build it Anyway
- Expense benchmarks, check out Joe Stump’s How To Spend your Investors’ Money
- Fred Wilson, Forecasting
User Acquisition, Lifetime Value, Cohort Analysis, Analytics
- David Skok, Modeling User Acquisition
- Andrew Chen’s post on Facebook Viral Marketing (commentary and links to cohort analysis)
- Jeremy Liew’s how to estimate lifetime value for an ecommerce business (with cohort analysis)
- Jeremy Liew’s earlier post on how to estimate lifetime value (with sample cohort analysis)
- Andrew Chen’s how to calculate cost per acquisition for startups
- Andrew Chen on What Factors Influence DAU/MAU? Nature v. Nuture (also, Appdata is a great resource for DAU/MAU data)
- Sean Moran, How to project customer retention for a subscription business
- David Skok, SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters
- Christoph Janz, A KPI Dashboard for early-stage SaaS Startups
- Andrew Chen, What’s Your Viral Loop?
- Dave McClure, Startup Metrics for Pirates
- Rahul Vohra, How to Model Viral Growth
- Kyle Rush, Optimization at the Obama Campaign, A/B Testing
- Ben Sesser, Memo to this year’s YC class: It’s damn hard to build an enterprise company, including some stats about enterprise companies
Revenue Models and Forecasts
- Fred Wilson, Web and Mobile Revenue Models
- Steve Blank, The Business Development / Customer Development Stack
- Tim Berry, Creating a Sales Forecast
- Venture Hacks, What Should I Send Investors: Deck
- Garage Ventures, Perfecting your Pitch
- Mark Suster and Mark Jeffrey, What Makes a Good Pitch
- Examples of web pitch decks by Piccsy, Dressrush, CSS Piffle