At what stage of a startup's life cycle is it helpful to create a financial model?

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Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

I’m a CPA and interim CFO for 150+ startups and I’ve helped many of my companies build financial models that have gotten the thumbs up from top VC firms and the pickiest of investors/board members.

You’ll want to create a Financial Model just before your Series A, which is when large investors really start to demand a well articulated plan. Occasionally, an investor may request a financial model in a Seed Round. But whether or not an investor demands a financial model, you should build one to establish your own goals. You’re much more likely to achieve your milestones if you take the time to benchmark your progress on a monthly or quarterly basis.

While you may be able to start with a template, keep in mind that your business is unique, and therefore your model should be as well. Here are some common points that you’ll want to include in your financial model:

  • **3 Years of Projections. **Occasionally investors will ask for more/less, but start with 3 years.

  • **3 Statement Model. **Include a Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows. Each should balance and tie back to each other (this gets tricky).

  • Your KPI’s should be your Drivers. Every company has a dashboard of metrics that they track growth and success by. A few examples include number of users, customers, margin, customer acquisition cost, Twitter followers, website traffic, etc. Look to the past and show that there is a correlation between X (could be # of Sales Reps) and Y (could be your revenue), then use this as a driver towards the future projections.

  • Churn. Customers will leave. Account for this.

  • Waterfalls. Your financial model should be dynamic. Waterfalls show how you actually performed against your projection and then resets the future accordingly.

Don’t show an investor a financial model that shows smooth growth “up and to the right.” No company’s growth is without bumps. These models take a lot of time to build and are highly personalized, so it really is best to consult with a professional. If you’re planning on raising $3M+ you should come prepared with a well thought out financial model.

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