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Your Financial Model.
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.
I’m a CPA and interim CFO for 200+ 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. 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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