Of course, they do! Especially, if they want to have more clarity about growth potential of own business, gain better insights of how their startups stand against peers as well as get recognized and remembered by prospective investors as highly organized founders. Take it this way. Imagine you are a typical tech college graduate with zero to five years work experience and almost no personal savings in your bank account. You have just married to your beloved one and both of you are very excited that you officially formed a family. After thoughtful discussions, you agreed to start planning for your first baby. Do you know what are the costs associated with planning, delivering and raising a healthy child for the next 3-5 years? Is your income growth sufficient to cover these expenses? Can you optimize some non-essential costs or find a better-paying job if required? If you plan to take a bank loan, is your income source stable enough to cover liabilities?
When bootstrapping a startup, there are so many things that can negatively impact your business. The financial model is an essential tool for planning a business, improving its efficiency and assessing equity value. So how can it help you get more organized and increase odds in this game?
It can help you to translate vision into measurable targets. The financial model serves as a great tool for connecting all key elements of your business together. With a proper model, you can quickly understand the sources of your revenue and costs, zoom into estimates for monthly cash burn, find break-even point and get a clarity of how much capital is needed before your company turns cash-flow positive. In a nutshell, the financial model allows both founders and their investors to obtain a holistic picture of how business is designed to function and generate cash.
It can help you to better understand value drivers. The financial model allows you to identify the factors that make the maximum contribution to the growth of your startup. This is achieved by examining the initial assumptions and analyzing their impact on financial performance. Understanding the magnitude of changes of specific internal and external factors on the financial position of your startup will make you be better prepared for different scenarios and thereby reduce business risks.
It can help you to explore new scenarios for growth. Reduce bias of your gut feelings by understanding the math behind available opportunities for your company. The financial model can set a mental framework to ideate new growth initiatives. Look at value drivers, analyze your current performance, ask questions, put hypotheses and test them: Why the trial conversion has decreased? Why the number of sales per customer has decreased? How can we reduce customer churn by 1%? How can we increase the average revenue per unit by 10%? What is needed to earn 10 x current revenue? All components of the financial model are closely related to each other, allowing you to see your startup performance holistically and make informed decisions.
FinChart is a modern financial modeling software for startup community. Our aim is to make financial modeling a simple and intuitive experience for startup founders and their investors so that they could spend more time on other value-added activities.