Keep it simple.
Financial models can take on a life of their own. What begins as a simple representation of your business gradually becomes a trumped-up 25-tab monster. While fine-tuning the model can be strangely satisfying (just me, then…?), it’s important to focus on the basics.
In an environment where the average VC spends less than four minutes reading a pitch deck, you’ve already done tremendously well to get someone to look at your model. So, it’s important to keep things as user-friendly as possible – these classy tips will help you create a financial model for your business:
- Size: Keep the model lightweight and the number of tabs to a maximum of three to four. Any more and the model can become cumbersome and confusing
- Complex formulas: Sometimes they’re essential, but they can limit the ability to trace the flow of your model. There are no prizes for Excel wizardry, so split out those complicated formulas into multiple lines
- Assumption tab: These are particularly relevant for slightly larger models – by consolidating all drivers into one tab (and linking from it), you let users play with your assumptions easily
- Colour code: By including a simple legend (and sticking to it) you make it easy to distinguish which cells to focus on.
Understand your KPIs.
For any company, you can likely pick out dozens if not hundreds of KPIs. But the purpose of the model isn’t to pick apart your business to this level. Instead, it’s about identifying the fundamental few. Check out Claire Faquier’s classy guide to some of those relevant to subscription and eCommerce businesses.
Once those KPIs have been identified, you should understand their historical evolution. Then, craft a story around how you’ve projected them. Why does CPA halve next year? Why does the conversion rate triple over the coming 18 months?
Talk to friends.
The more time spent working on a model, it becomes easier to build a wall around it – and harder to spot problems. Have someone fresh take a look at it, whether that’s a colleague, friend or family member. This is so useful to identify mistakes and ensure people can intuitively understand the flow and structure.
Models are built bottom-up, looking at the small levers in your business affecting the top and bottom lines. Once you’re happy with your outputs, an invaluable exercise is to cross-check with macro information. Have you projected £500m revenue in 2019 in a market expected to be £400m?
Finally, ensure your model ties in with your pitch deck. Costs should match the percentage split you described. And if you said you’re raising £1m to last 18 months, make sure you don’t run out of cash in Month 14…
An old boss used to say to me: “The only thing I can guarantee is that your model is wrong.” This is a fact accepted by most investors. It is unlikely you’ll be held to your projections (and should raise alarm bells, if someone views this as a requirement).
Instead, financial modelling is just one part of a broader company picture. Most investors want to know that founders think about their business logically, have an understandable flow, and know how to build long-term value.