The all-important financial model is the instrument in which you will present information about your company to those you are hoping will help finance your endeavors. It cannot be overstated that this document needs to undergo a thorough examination to ensure its solid construction prior to presentation. In addition, it will help you to develop key insights about your idea’s potential.
First, however, it is necessary that we discuss what a financial model is. It is a conglomeration of calculations that demonstrate how your business is designed to run. It will contain inputs and outputs and items such as, expected costs, income, terms of payments, and rate of taxation. It will also serve as a predictive tool to help you determine your company’s likely trajectory. Below are some best practices for preparing your financial model.
Include A Legend
Your model needs to be easily understood at a glance, and this is difficult to accomplish when you use abbreviations that are specific to your field. A simple explanation of terms can work wonders, and it is also useful to define your terms. Never assume that the venture capitalist is aware of what your stats mean.
Keep It Simple
You don’t need a complicated expression of your company’s details in order to impress your chosen financial institution. You can break down your formulas into smaller steps, and you can present your calculations in bite-sized chunks for easier digestion. Aim to keep your model transparent.
Make It Logical
The planning phase should include a thorough analysis of what you wish to accomplish with your model. There needs to be an underlying logic that determines the flow, creating a clean visual. It should reflect the factors that will drive revenue, asking price, and the various costs you will encounter.
Give enough detail to let investors see how certain factors will affect the pieces of your model. You can achieve this by expressing a particular value for your projected customer base, showing the ways in which this figure is connected to your other items. This way, it can clearly be observed the changes that this one aspect will have on the others.
Use Proper Formatting
The employment of standard techniques for representing your numerals will go a long way in ensuring understandability. For example, the use of commas in numbers over 1,000 is essential, and you want to make sure that your digits are displayed in a manner that is precise and whereby they cannot be mistaken with other values.
It is commonplace to use color coding, just keep in mind that this technique cannot be used to order the cells. Also important to notate when designing this system is the fact that 8% of men are color blind. Pick colors, therefore, can be distinguished by people with this condition. It is generally recommended that assumption sheets have a light grey fill and that outputs utilize white or no fill.
To chart your startup’s evolution, it is good to title your spreadsheet with something like [Business Name][Forecast][yyyy,mm,dd]. It gives the appearance that you are organized, and it can help your venture capitalist know what he or she is looking at immediately.
You’ll want to use a consistent style throughout your model, and you can use colors to distinguish between assumption cells and non-assumptions. Your tabs should be ordered from left to right, and each one should have a label that is meaningful.
Fidelman & Co. specializes in management consulting, presentation advisory, and financial modeling. We focus on building businesses alongside entrepreneurs and investors. Contact us today for more information about what we can do for you.