Financial modeling matters.

With so many priorities, running a successful startup is always challenging. While focusing on developing new technology, attention to financial modeling is also a critical element. Preparing for fundraising or aiming toward financially sustainable business - financial modeling is an important factor.  It can validate the business model, reflect various business scenarios and anticipate the possible financial impact, and support the fundraising process. 

Building a financial model is not complicated (there are many templates available online). Indeed, most of the startups already have a financial plan in place as part of the business plan. It includes estimations of market size, sales forecasting, and possible expenses.  

There are few approaches to financial modeling. The most common is from a macro perspective towards a micro (also known as the top-down method). In this approach, 3 main factors are taking into consideration: total available market (TAM)  for the product/solution, serviceable obtainable market (SAM), and Serviceable Obtainable Market (SOM). Many startups prefer this approach as it provides them with the opportunity to be very optimistic in sales forecasting (the SOM part). 

The bottom-up approach goes from micro to macro and much dependent on the companies data (once available). This method could be used once the startup gains more real business data and can measure the metrics against historic data, accordingly. Obviously, when we speak about startups, historic data is not always available. 

Most of the startups would prefer the top-down approach (TAM, SOM, and SAM) as it can reflect a more optimistic projection. In this case, it is highly important that the financial estimations and assumptions would be backed by professional market research. Done properly, chances are that the financial modeling process will be much more accurate.