Nothing can guarantee funding for a startup – not even a great business idea! However, a well-researched financial model definitely helps get you closer to your goal. Typically, a financial model contains revenue projections, cash flow projections and growth projections for your startup. It shows that you are serious about your business. You should be able to plan your financial model in an excel sheet, providing details about your possible expenses and income. For instance, if you are planning to use accounting services and tools like xero accounting software instead of hiring an accountant, your financial model should include accurate numbers to show it would be a profitable deal. Here are some useful tips on how to create an effective financial model for your startup.
Start by defining your business model. The idea is to confirm whether your business model is feasible. You should find answers to some critical questions, including whether there is enough demand for the products or services you are planning to provide, when to launch your business to gain maximum profit, how to promote your products, who could be your competitors, and whether there are any risks involved with your business. You can do your own research, seek advice from industry experts, conduct surveys, and gather existing data – all to find out comprehensive answers to your questions. Conducting a feasibility study is a great way to find out whether you have a good chance of getting success in this business.
It would be easier to calculate expenses than to make revenue projections for your startup. When calculating costs, be sure to include all possible expenses, including one-time investments and ongoing investments. For instance, you may need a lump sum for leasing an office premise. At the same time, you should also calculate your ongoing costs, including advertising expenses, equipment leasing costs, loan repayments, employee salaries, utility bills, and expenses for office supplies. There are mainly two types of projections – bottom up and top down. You need to choose one, depending on your business type and financial obligations. The bottom-up model works by making a number of revenue assumptions, while the top-down model works by fixing a revenue target and then working backwards to find out how much you need to earn to meet that goal.
Your financial model should also include income projections. You need to find out how much revenue you should generate to reach the breakeven point, how much you can possibly grow after surpassing the breakeven point. Tracking income for making revenue projecting is not an easy task. There are many ways to accomplish the task. You can use spreadsheets and create income projections and cash flow projections in the traditional system. On the other hand, you can use cloud accounting services and advanced tools like xero accounting software to generate detailed reports and track your company’s expenses and income more quickly and conveniently. Cloud accounting also helps multiple members of your team to view and analyze the reports anytime and from anywhere.