A startup financial model will help to prevent the owners and managers of startups from making potentially detrimental financial decisions. A startup financial model is typically a 3 to 5 year forecast of projected income and expenses for the business based on key underlying assumptions. Financial planning is essential to the long term success of any new business and studies have shown that the failure rate among startups is as high as 90%! A Startup Financial Model can be a very useful tool in preventing startup failure. Here are 3 reasons why every startup should use a startup financial model.
1. Obtaining Funding
A startup financial model is key to obtaining funding in a competitive marketing landscape. Potential investors need to be satisfied that a startup will generate sufficient cash flows so that they will make positive returns on their investment prior to investing in any business. Given the high failure rate among startups, investors want to ensure that they do not invest into a business that is doomed for failure from the beginning. One way that startups can establish credibility and attract investors is by using a well prepared startup financial model that will clearly outline the earning and expense forecasts of the business. No investor will consider funding a startup without solid financial data to support the business projections.
2. Ability to Create What If Scenarios
In business, there are a myriad of things that could go contrary to plan. With the best intentions in the world and with the best laid plans, the economy, market conditions and government decisions can work against any startup business. A startup financial model will help business owners to factor worse case scenarios into their financial projections and to make key business decisions based on their worst case scenario findings. A good startup financial model will allow you to see the effects of adverse events such as a decrease in market price or slower growth than predicted. The model will help to identify key areas of strength and weaknesses prior to investing any money into the business.
3. Avoid Throwing Away Money
A startup financial model will prevent startups from throwing away money that may be better invested otherwise. Using realistic projections based on what is known and what is expected within any given marketplace, a startup financial model will help business owners to identify investments that are likely to fail in the short to medium term. Once the likelihood for financial failure is clearly established, startups can then make prudent decisions about whether to proceed or not. Without a startup financial model, the chances are high that money will be spent on businesses that were doomed to fail from the very start.
The failure rate among startups is high. A startup financial model will help to clearly identify potential losses up front, to estimate the effects of adverse market conditions on a business and to help business owners to obtain funding for their startup.