Ask HN: Best way to build a financial model?
2 comments
I've made half a dozen or so very detailed models for varying start-ups and therefore have gone through the process a quite a few times.
1) Please make sure you understand accounting/finance (Income, balance sheets, cash flow, inventory, etc).
2) Who is your target: this determines how detailed, modifiable, and annotated the model should be.
3) Don't worry about the assumptions at first, just get best guesses and build it. Then when done hunt through available financial models to find comparable values. (Have all assumptions on 1-2 pages/sheets and nothing else, I usually have 1 for revenue assumptions and 1 for cost assumptions)
4) Make sales targets/growth easy to modify (in a separate table/sheet) so a statistical analysis can be completed easily if needed or different revenue models can be tested.
5) After you've made the model check your calculations by hand and make sure the values make 'sense'.
1) Please make sure you understand accounting/finance (Income, balance sheets, cash flow, inventory, etc).
2) Who is your target: this determines how detailed, modifiable, and annotated the model should be.
3) Don't worry about the assumptions at first, just get best guesses and build it. Then when done hunt through available financial models to find comparable values. (Have all assumptions on 1-2 pages/sheets and nothing else, I usually have 1 for revenue assumptions and 1 for cost assumptions)
4) Make sales targets/growth easy to modify (in a separate table/sheet) so a statistical analysis can be completed easily if needed or different revenue models can be tested.
5) After you've made the model check your calculations by hand and make sure the values make 'sense'.
http://en.origoterra.com/2010/05/startup-financial-model-is-...
This may be a good starting point.
This may be a good starting point.
I wouldn't recommend using this as a basis for building your model. Use it to assist you by all means but you'll learn a lot more by building your own, and it doesn't need to be anywhere near as complex as this one.
Always use relevant operational drivers for your business - this model is a very generic one that takes income by month as an input and then just grows it by arbitrary percentages after the first 3 months.
So e.g. for a web based business often key drivers will be traffic to your site, conversion rates, price of product (and percentage growth rates for these). Once you have these you can calculate revenues (which could then go into the spreadsheet linked to here if you really wanted to use it).
But it's this operational modelling that really is key to both helping you and any investors understand the economics of your business.
Make sure everything (revenues and costs) are broken down month by month for 3 years. Roll up to yearly totals on a summary sheet if you want.
You can build a decent model in two/three sheets. One for key assumptions/drivers + summary results, and one for an operational model and P+L. You could do cashflow on the 2nd sheet or separately on a 3rd.
Always use relevant operational drivers for your business - this model is a very generic one that takes income by month as an input and then just grows it by arbitrary percentages after the first 3 months.
So e.g. for a web based business often key drivers will be traffic to your site, conversion rates, price of product (and percentage growth rates for these). Once you have these you can calculate revenues (which could then go into the spreadsheet linked to here if you really wanted to use it).
But it's this operational modelling that really is key to both helping you and any investors understand the economics of your business.
Make sure everything (revenues and costs) are broken down month by month for 3 years. Roll up to yearly totals on a summary sheet if you want.
You can build a decent model in two/three sheets. One for key assumptions/drivers + summary results, and one for an operational model and P+L. You could do cashflow on the 2nd sheet or separately on a 3rd.
Thank you, the article and the sample model are very usefu!
For my internship i need to dive into the topic of financial modelling for a technical start-up. I would be very thankful if you could share some best practices in getting the assumptions right and building a financial model generally. Anyone who is interested in some sort of chat on that topic is also very welcome, it would really help me out!
Thank you in advance!