Startup Financial Models: Why they matter and how to build them
Goal setting and tracking is the backbone of every successful business. Access our free startup financial model template here, and read on to dive into the what, why, and how of financial modeling for startups.
- What is a startup financial model?
- What components should a startup financial model contain?
- Ramp’s free three-statement model template for startups
What is a startup financial model?
Forecasting across key metrics, such as revenue and core expenses, helps teams ensure they are marching in the right direction, holds functional teams accountable, allows finance leads to calculate runway, and helps founders make strategic decisions for their business. A startup financial model is an essential tool that numerically represents a startup’s strategy, vision, and goals across KPIs.
What components should a startup financial model contain?
The exact metrics forecasted may differ slightly based on your startup’s core business, but at a minimum, startup financial models should include revenues, customer count, expenses, and runway. One of the most common types of financial model is a three-statement model, which links an income statement, balance sheet, and cash flow statement into one dynamically connected model.
Forecasts should be based on growth assumptions applied on historical data, and teams should pressure test assumptions made around growth rates and conversion rates. The higher level of confidence you have in your forecast, the more strategic you can be when planning based on projected financials. If you have limited historical data, or other reasons to believe your internal data will not accurately inform assumptions, we recommend using industry benchmarks.
In early stages, focusing forecasts on near-term revenue, customer, and cost projections helps teams narrow in on what matters. However, as a startup evolves, forecasting will get more nuanced as different divisions run their own P&L and hiring processes and teams start to look at additional metrics. Regardless of the size of your startup, these forecasts will play a critical role not just in internal planning, but also in VC fundraising, as they will drive all conversations around financial projections and due diligence.
Ramp’s free three-statement model template for startups
It’s clear that a startup financial model is essential for your business, but it can be tedious to build one out from scratch. That’s why the team at Ramp has built a template for you to get started, with the ability to modify as needed. Go ahead and click here to get started.
How to navigate our free startup financial model template
If you’ve never seen a three-statement model before, or spent much time digging into one, they can be confusing and overwhelming. We’ve added comments throughout the template to make navigation as easy as possible, but you can find more detailed instructions on how to make sense of the model, and apply it to your business, below.
- The template is broken out into a ‘Model Summary’ tab, which contains the three-statement model, including all inputs and outputs, and a ‘Headcount Census’ tab.
- While not used directly in the Model Summary tab, the Headcount Census tab can be used to model headcount expenses.
- All inputs are highlighted yellow, and the rest of the model will update dynamically.
Navigating the Model Summary tab
- The Model Summary tab is broken out into an Income Statement, Cash Flow Statement, and Balance Sheet.
- Income Statement - illustrates total profit or loss over a period of time. Informed by user revenue and expense assumption inputs
- Cash Flow Statement - illustrates how much cash and cash equivalents (CCE) are generated and used during a given time period
- Balance Sheet - states total assets, liabilities, and shareholders' equity at a specific point in time, offering a comprehensive view into a business’ financial position
- Revenue and expense inputs will inform the model output, so aim to maximize level of confidence in projections. You can reference the Headcount Census tab to inform payroll expenses in detail.
- The model is structured towards a B2B SaaS that tracks financial performance monthly and annually, but you can leverage the general structure as a starting point and adjust to fit your needs.
- We strongly recommend spending time getting familiar with the model and understanding how all components of a three-statement model work together.
VCs and angel investors are going to want to see your core projected business metrics - revenues, costs, customers - regardless of how mature your startup is. However, as your startup matures, the list of metrics investors are interested in seeing also grows. You can view our full list of recommended metrics, and access our list of 100+ free startup pitch deck examples, here.
Financial projections are often used to inform nearly all short-term and long-term planning for a business. Tactically, under-forecasting can lead to teams leaving strategic growth levers untapped, and over-forecasting can lead to frustrated teams, mismanaged cash flow, and ultimately more adverse cost-cutting measures.
Every startup is different, which means the specifics of every startup financial model is different. Our free tool is more targeted towards B2B SaaS businesses, and while we’ve tried to keep the template as applicable as possible to a wide range of startups, it’s not a silver bullet. We recommend using this template as a starting point and making adjustments as needed, as nobody knows your business better than you do. You can even learn more about the best way to create your balance sheet by reading the Ramp Team’s deep dive here.