Financial Modeling for Startups: Explained - Startups 101

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Intro (00:00:00)

A financial model is more than a spreadsheet; it's a tool for inputting data and generating critical business insights.
It answers vital questions like how much runway a company has, how much to raise from investors, and company valuation.
It's important for startups not to just input revenue goals but to understand revenue as an effect of various business activities, using driver-based modeling.
Founders must avoid making overly simplistic or unfounded assumptions in their financial models.

Financial models begin on a canvas rather than a spreadsheet.
The color-coded system helps differentiate categories: Green for revenue, Red for Costs, Blue for SG&A, and Yellow for CAPEX.
Links to spreadsheet templates with this color coding are provided in the video.
Within these categories, items like rent, subscriptions, and headcount can be budgeted for accurately.
SG&A can be estimated based on per-user costs such as GSuite subscriptions or co-working space fees.

Revenue should be the output, not the input, of the financial model, driven by marketing and sales efforts.
Assumptions in the financial model should be grounded in reality, like industry-standard costs per click or install.
Organic Traffic is the only driver not directly proportional to an expense and must be modeled based on reasonableness and potential caps on traffic growth.
Other types of costs, such as a sales team or marketing budget, are blue boxes representing SG&A expenses that drive revenue.
Realistic assumptions for conversion rates and the efficiency of marketing spend are crucial to model accuracy.
Financial models should be simple to manage, respond to business needs, and grow in complexity as needed.
The primary goal is for the model to be useful, not perfect, reflecting actual business trends.

eCommerce platforms can estimate revenue by multiplying the expected number of monthly orders by the average order size and margin.
For SaaS companies, average revenue per account (ARPU) assists in estimating monthly recurring revenue (MRR).
Churn needs to be included as it represents the customers that are lost every month.
For realistic estimates, companies should use real user data or industry benchmarks as inputs for their financial models.
Direct costs such as server and infrastructure costs should be tied to MRR or the number of active customers.
Driver-based modeling allows for the estimation of additional expenses, such as predicting the need for a new customer support agent for every 1,000 active customers.
The financial model should incorporate all expenses and critical metrics and evolve based on the company’s live data.

Slidebean offers a Financial Modeling Workshop, designed to help businesses build a financial model.
The workshop provides a blank model, guidance from a senior analyst, and a team to add new functionalities to the spreadsheet.
Customers will participate in sessions that help them build their business model and, by the second month, start adding revenue lines.
The approach is designed to educate entrepreneurs on building and managing their financial models.
Links are provided for booking the workshop or for further inquiries.