How to build a financial model - startup guide

The Assumptions Sheet

This is where all your core model assumptions should live, and this is where you will be spending nearly all your time once the model is completed. Taking time to properly format and structure the assumptions sheet will make your life significantly easier.

Residents of the assumptions sheet include:

1. Revenue assumptions

a) Volume assumptions - number of customers or items sold, and expected monthly growth rate

If you’re calculating your number of customers from a marketing funnel (e.g. website impressions > sign-up rate > conversion to paying customers), as in the template model, funnel assumptions should sit with volume assumptions.

b) Pricing assumptions - ?how much you charge for your product

This could be as simple as a unit price (e.g. ￡20 per item) or as complicated as a tiered SaaS subscription model (e.g., ￡10/month for a personal subscription, ￡1,000/month for a small enterprise subscription, ￡5,000/month for a large enterprise subscription). It can also be a commission rate

2. Cost assumptions

This includes direct costs (such as cost of materials per unit produced) and indirect costs, or “overhead” (sales & marketing, general & administrative and others).

3. Cash flow assumptions

This includes your current cash balance and your expected fundraising round amounts.

4. Personnel assumptions

Though they are technically part of the cost assumptions, personnel costs (i.e., salaries) are usually by far the largest cost component at this stage of a business. It’s handy to keep them in a separate sheet to help keep track of headcount and strategise around future hiring decisions.

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The Engines

The engine sheets are where you work the assumption numbers into monthly financial results. It’s an exercise of logic and basic accounting, backed by a core understanding of your business model. Thankfully, google can supply several examples of best calculation practices, usage of excel formulas and typical model structures.

The key is to take your time to automate things properly - so once you are done, you will only come back to these sheets for structural additions.

1. The Revenue Sheet

Volume and price can take multiple formats. You can also have multiple segments and/or revenue streams—one-time purchases, subscriptions, commission—meaning in the same model you can have a few different forms of Volume x Price. Think through each of them separately, add them together at the end.

2. The Costs Sheet

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COGS are direct costs related to the physical products you are selling (such as the cost of fabric for making a piece of clothing) and are calculated on a per unit sold basis. Service companies (such as SaaS businesses) rarely have COGS.

For overheads, in general, you can have the following cost “categories”:

Fixed rates (e.g. insurance, rent) - anything that is charged as a fixed contractual amount on a monthly or yearly basis

Growing costs (e.g. hosting services, , direct marketing) - you will usually have an initial fixed value for these, accompanied by a “growth rate” which you assume is needed to support the future scaling of the business

Variable costs based on revenue (e.g. COGS, certain advertising costs) - anything that is estimated as a % of your achieved revenue

Variable costs based on personnel (e.g. travel, entertainment, hybrid workspaces) - assume a cost per employee, and multiply by headcount

3. Cash flow modelling

Cash flows should be modelled as simply as possible (see below). Starting from the current cash position of the company:

1. Add any incoming investment cash and operating profit

2. Subtract any cash operating losses and capital expenditures

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The Summary Sheet

This effectively paints a picture of your company development for the next 1-to-3 years. In its simplest form, a summary sheet should show two things:

1. Total Revenues – Total Costs = Operating Profit / Loss

2. Existing Cash + Incoming Investment (+/-) Operating Profit / Loss = Cash Position

It’s worth having a more detailed summary sheet, so that you don’t have to sift through your engines to find additional information. This should include:

Volume (by segment or by type, if applicable) - while pricing is internally defined, volume varies based on external reception of various strategic choices. Looking at volumes separately can give you tons of insight on how recent strategies have been performing

Revenue (by segment or stream, if applicable) - this is the key metric for any early-stage business. Looking at it by segment/stream provides insight into how each chosen vertical is performing separately

Personnel expenses - should always be listed separately, given they are almost always the largest cost. As your team develops, it can be useful to split personnel expenses by function/team

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Expenses (broken down by size/importance) -?it is not critical to break down expenses (apart from personnel), unless one of them is significantly larger than the others or provides meaningful insight into the workings of the business