10 Most Important Things in Making a Financial Model

Creating a financial model can seem like a daunting task at first, but it doesn’t need to be! We have a lot of financial model examples and different types of financial models for startups we sell, and they all follow the same structure. And so that is probably the most important thing to do when building your financial model, and that is to have structure to your model and follow some basic guidelines which we’ve highlighted in the 10 Most Important Things to consider below. A well-structured financial model helps in decision-making, forecasting, and attracting investors so it is important to have something that you feel comfortable with and that you believe accurately shows how your Company is performing.

Here are the ten most important elements to consider when building a three-statement model or even different types of financial models:

1. Define the Purpose

Before you start creating your financial model, clearly define its purpose. What does that mean? It means what are you looking to use your financial model to do. Are you using it for fundraising, budgeting, or strategic planning? Understanding the model’s objective will then help guide your structure and the data you need to include. The great thing about ALL the Excel Model Templates you’ll find in our shop is that they have been built to be multi-purpose for both a founder looking at just understanding their financials or if they also wanted to seek financing. Our 3 way model which shows the Income Statement, Balance Sheet and Cash Flow is supported also by a Valuation page which investors and Founders will find useful in understanding what their business is worth. Financial model example excel templates can be found in our shop here.

2. Gather Accurate Data

Data accuracy is extremely important when it comes to financial modeling. Moreso the “actuals” that you will populate your model with, which will give you a good basis to do your forecasts from. For example, alot of forecasts and projections are based on actual numbers from your business, so it is vitally important you have put in the correct Revenue or Sales numbers if you want to forecast what Revenue or Sales will look like going in to the future. Similarly, a popular way of forecasting future expenses is to base it on % of Revenue. So if you’re Revenue number is inaccurate, likely the rest of your model projections will also be inaccurate when it comes to expenses. And inaccurate data can lead to misguided decisions and also loss of credibility if the model finds itself in investor hands. But don’t worry, we have made this process easy for you with ALL our models having “Blue” input figures (i.e. you only have to change the figures in Blue) and everything else flows through seamlessly. That’s why our customers use our Financial Model Templates as a starting point for their modeling needs. Financial Model examples we sell are across industries, so whether you are looking for a SaaS financial model template, or a Hotel three-statement model, we have it all covered!

3. Choose the Right Structure

A financial model should be logically structured. Typically, it includes sections for assumptions, income statements, balance sheets, cash flow statements, and supporting schedules. A well-organized model allows users to navigate easily and understand the relationships between different components. This is particularly important for Founders in that they quickly understand the link between Revenue and also Cash Flow, as well as Cash Flow to Capex and Assets/Liabilities. We have included a set structure in all our Financial Model templates according to Industry relevance. Types of financial models we have available are a three-statement model templates, types of financial models for startups and other financial model examples by specific industry type.

4. Make Assumptions Explicit

Clearly state your assumptions regarding growth rates, costs, and market conditions. This is very important to any financial model and gives transparency that allows others to understand the basis of your projections and evaluate the model’s financials. It is also important to not over complicate a model with too many assumptions as well, so keeping it simple initially is sometimes the way to go. Detailed models are absolutely okay too, but that depends on whether you can explain all your assumptions in a way that makes sense and is credible to an investor if that’s your purpose for the model. Additionally, consider including a sensitivity analysis to show how changes in assumptions affect the results – this is useful for both the founder to make better decisions and also investors to stress test what certain assumptions could do to your forecasts.

5. Utilize Consistent Formatting

Consistency in formatting is essential for readability. We can’t stress how important this is. Use uniform font sizes, colors, and styles throughout your model. We have done this especially where it comes to “inputs” for the user to change. ALL inputs in each of our models have “BLUE” font that clearly shows where a hard coded number has been input. The rest of the model is in “BLACK” font which is all formula driven. Consistent formatting makes it easier for users to follow the calculations and understand the flow of the financial model. Now even though we sell different types of financial models for startups, we still keep all the consistency in our financial model templates and three-statement models the same.

6. Build in Flexibility

A good financial model should be flexible enough to accommodate changes. Design it to allow easy updates to assumptions and inputs without disrupting the overall structure. This flexibility is crucial for scenario analysis and future projections. All the financial model templates we’ve built has taken this into account. We know that a “template” is a good starting point for a founder, so we have purposefully built a common structure around the flow of the model with common assumptions, but each model allows the user to also change input drivers where they want to. We would just suggest that when doing so, save a previous version of the model just so that your changes don’t impact the flow of the model and you can go back to a previous version.

7. Include Comprehensive Calculations

Make sure your model includes all relevant calculations. Common components include revenue projections, operating expenses, capital expenditures, and financing costs. Detailed calculations provide insights into profitability and cash flow, essential for stakeholders. Again we have taken care of this part for you in building our financial model templates so that you can focus on the input drivers and assumptions, whilst the rest of the model flows seamlessly.

8. Integrate Visuals

Visuals such as charts and graphs can enhance the understanding of your financial data. They allow users to quickly grasp trends and comparisons. Incorporate visuals strategically to support key points and highlight important metrics. We have included Chart pages in all our financial model templates for this exact purpose. Users can also use Excel to come up with their own graphs and tables from the output pages in the model.

9. Stress Test Your Model

Once your three-statement model is built, stress test it by varying key assumptions and inputs. This process helps identify potential weaknesses and ensures that your model can withstand fluctuations in the market or business environment. Stress testing adds credibility to your projections and demonstrates thoroughness in your analysis. Many people stress test assumptions for changes in the macro environment (i.e. interest rate changes, FX movements etc) or micro environment (changes in the cost of a product from a supplier as an example, and what does an increase of 20% to your product cost do for your margin and also cash flow).

10. Document Everything

Finally, document your model thoroughly. Include comments explaining your calculations, assumptions, and methodologies. Documentation serves as a reference for users and helps maintain clarity, especially when the model is shared with others. No one knows your model better than you – but sometimes this can be a problem. That’s why documenting everything is so important so users can see the story in the way you see it and commenting or explaining certain parts that may otherwise not be apparent from just looking at something, is very useful.

Final thoughts!

Building a financial model is an essential skill for anyone involved in business planning or investment. Every Founder should be equipped with a financial model that tells the story of their business today and also captures where the business is heading in an easy to understand format. By focusing on these ten key elements, you can create a robust financial model that supports strategic decision-making and enhances your ability to communicate your financial story effectively. Whether you’re a startup founder or a seasoned finance professional, these principles will guide you in developing a model that is both accurate and impactful. Feel free to look at all of our existing financial model templates by visiting our shop to see if there are any you think could be helpful to you and if there are others you think you’d like us to work on, please send us an email and we’ll add it to our development pipeline!