Economics

How to Build a Financial Model – The Best Tool Ever

If you’ve read my previous post on unit economics you know how important assumptions are in building a financial model for your business.  However, building assumptions into a financial model requires some strong skills in Excel as well as a deep understanding of the three basic financial statements:

  • Income Statement
  • Cash Flow Statement
  • Balance Sheet

The purpose of each statement is probably worth a whole other post.  Each statement is important for understanding how the business will work in financial terms.  Simply put, these are the basic purposes for each statement:

  • Income Statement – How Your Business Works (sales and expenses)
  • Cash Flow Statement – Your Ability to Pay or Grow (actual cash on hand)
  • Balance Sheet – What You Own and What You Owe (if you have to liquidate, what you have left)

My students have always struggled with putting together all of the pieces based on assumptions. Since most entrepreneurs put together these statements pro-forma (forecasted), assumptions are the only way to explain to a potential investor why your projections are believable. Some examples of assumptions in a financial model are:

  • Number of sales per location, salesperson, etc.
  • Variable costs (costs to make one unit)
  • Fixed costs (costs to be in operation such as rent, salaries, etc.)

Estimating assumptions is in itself, quite difficult.  Incorporating assumptions into a financial plan that shows a path to profitability is a key skill any entrepreneur seeking investment needs.  This past summer I stumbled upon an online tool that is better than any other I have found to help entrepreneurs do this.  I should also mention that I have no personal ties, ownership or monetary gain to make by promoting this tool.  I simply want to share it because, well, its awesome.

The tool is StartUpFinancialModel and was founded by Wade Myers, an experienced investor who teaches financial modeling at Harvard Business School.  He created it to address “what he thinks is the single biggest weakness of most business plans: the lack of a detailed financial pro forma that helps entrepreneurs and investors gain full visibility into all of the assumptions, cash requirements, scalability, profitability, and the ramp up of the business.”

I have to tip my hat to Wade with what he has created.  He offers a free trial for 14 days and if you find it helpful, he offers two pricing plans at either $19 or $29 per month depending on how many users you have on your team.  This past summer, one of my clients (with no financial background) and I used it for his startup and it worked beautifully.  He actually gained a deep understanding of forecasts and assumptions just be using it.

I can’t recommend this tool enough.  I’ve tried them all and it far succeeds tools like LivePlan and BusinessPlanPro.  And, if you read my post on business plans, we all know that no one reads business plans anymore anyway.

Wade and I will be collaborating in January with my business plan class to further fine tune the tool and make improvements.  I’m excited about what this tool can do for my students and again, I have no financial stake in this whatsoever!

If you decide to give it a try, I’d love to hear your feedback via email: colleen@colleenrobb.com.

 

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