Financial Model vs. Business Model vs. Revenue Model - What is the Difference?

As an early-stage startup founder you have been recently given advice to raise money from VCs to fuel your growth engines. And if you have just started developing your pitch deck, make sure you understand the difference between terms such as “business model”, “revenue model” and “financial model”. All three terms are very popular discussion points be it during formal pitch or casual catch-up with VC professionals. Why bother? Because during the next investor engagement event you want to make sure your story seems right, and numbers add up to profits.

• Business model is a framework that holistically describes how your startup will generate value for its customers. It answers questions about your target audience, its pain points, your solution to address those pain points, sources of competitive advantage, and distribution channel to bring your product or service to the customer. It also covers other two important levers such as pricing and cost that together define your revenue model. Search for Lean Business Model Canvas to get more information on each of its building block.

• Revenue model is a significant part of business model that explains how your startup will generate financial income. In other words, it explains how you convert value-for-customer to money-for-company. Revenue model can vary depending on your target customer segments, how they perceive value of your offering, how much it costs for you to create that value and how much you can get paid for it. Choosing a right revenue model that fits your business and optimizes profits is crucial. There are numerous different types out there. Do you know your startup revenue model?

• Financial model describes the expected financial performance of your startup. The logic of financial projections is directly derived from your revenue model. It serves as an essential tool to forecast sales volume and calculate burn rate, identify break-even point and test various growth scenarios, define capital needs and estimate potential valuation. The best financial models have clear structure, sufficient level of granularity and well-documented list of key assumptions. When it comes to fundraising, investors believe that the way model is built tells a lot about founders’ personalities and how they manage and lead their businesses.

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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.