As a startup founder, you know that having a financial model is essential to reach your business goals. Financial modeling is the process of analyzing your company's financial situation and predicting future performance. But it takes careful analysis and skill, and creating one can be incredibly complex and time-consuming.
It's not unlike trying to rewire your home's electrical system. Sure, if you want to do the hard work and research, you can do it without help. But the simplest and safest option is to get support from a professional electrician.
The same logic applies when creating a financial model. Of course, you can try to build one on your own, but an expert will know how to manage all the numerical details, financial risks, and opportunities you're facing. And that's where financial modeling tools come into play.
Cutting-edge tools can help you create a professional-level financial model for startups with minimal effort and time. And with the guidance of a financial expert, you'll have everything you need to interpret your data and make sound financial decisions for your business.
What Are Financial Modeling Tools?
Financial modeling tools are software features, skills, and programs that allow you to quickly build, analyze, and optimize your financial models. These tools analyze your revenue and expenses by looking at key reports like your cash flow statements and balance sheets. Features like interactive graphical interfaces and real-time data analysis allow you to collate your data and make financial modeling and forecasting a breeze.
However, you can’t make use of financial information unless you’re able to understand the data at hand. Not all tools are tangible. The person managing and creating financial models, even with software or programs, needs to know where to plug in specifics to produce the needed projections.
Ultimately, financial modeling tools allow you to develop an accurate and detailed picture of your business's financial performance by combining your most important operational and market data points.
Why Startups Should Use Financial Models
Crafting and maintaining accurate, up-to-date financial models for startups empowers you to:
- Make informed business decisions – A well-built model can help startups make informed decisions for the future. You can use these models to assess the impact of different business scenarios, helping you make the right decisions about your startup's financials.
- Efficiently budget and plan finances – A comprehensive financial model enables you to improve budgeting decisions. It can help you forecast the financial performance of your business, helping you make the proper resource allocation and optimization strategies.
- Facilitate raising capital – An in-depth and insightful financial model is beneficial for early-stage startups, especially when seeking to raise pre-seed funding. It helps investors understand the business's economic situation, future profitability, and scope of growth, helping them make an informed investment decision.
- Improve stakeholder communication – A financial model helps to enhance the communication between startup founders with executives, employees, investors, lenders, and other stakeholders. It makes it easy to understand complex financial concepts, thereby improving stakeholder trust.
- Optimize the outcome of mergers and acquisitions – When you're looking to acquire another startup, expand or merge with another company, you've got to make several critical financial decisions that impact your business's future. Financial modeling helps you determine the best ways to optimize the merger or acquisition, helping you get the most value for your investments.
Types Of Financial Modeling Tools
Depending on the size and scope of your business, you may need one or more tools to create your financial model. You need to use the right tools to craft a well-built financial model that covers all the critical factors of your business's performance. We explore your main options below.
Accounting Software Vs Spreadsheets
Accounting software and spreadsheets are the two main tools available to optimize the financial modeling process. You can use both to collate and analyze your financial data. However, they both offer different features and capabilities.
Spreadsheets are popular for their affordability and user-friendly interface. But, there are some drawbacks to using spreadsheets. Let's examine the pros and cons of this tool:
- Easy to learn and use
- Available for free or at a low cost
- Flexible and customizable templates
- Limited data storage and analysis functions
- Manual entry for each data point
- Doesn't catch errors so that mistakes can go undetected
Software is typically more expensive than spreadsheets. But it can provide much deeper analysis and data storage capabilities. Here are the pros and cons of using accounting software:
- Automation capabilities for accurate data entry
- Sophisticated algorithms and analytics to detect errors and provide better insights
- Quick calculations for more efficient performance
- The cost of software can be expensive
- Models and features are dependent on the quality of data in the software you use
Regardless of the type of tool you choose, having a well-built financial model is critical for any startup. With the right tools, you can effectively assess and analyze your startup's financials to ensure success.
Which Is The Best Financial Modeling Tool For Startups?
When choosing the best financial modeling tools for your startup, it's important to consider how much data you need to store and analyze, the technical capacities of you and your staff, and how much you're willing to spend.
Ultimately, accounting software is more likely to save you money and time in the long run. With automation, you'll have less data to input manually. Moreover, you'll increase the complexity and accuracy of your financial insights through sophisticated analytics.
How To Pick The Best Financial Modeling Software
Whether you have an e-commerce business or a tech startup, your financial tools should have the features you need to improve your decision-making. Examining your needs is the first step toward success.
Here are some factors to consider when picking the best financial modeling software:
- Ease of setup
- Reports and analysis that you and your team can understand and utilize
- Shareability or collaboration capabilities if you're working with a team
- Software scalability so it can grow with your business
- Level of automation to reduce manual input
- Advanced support features for when you need help with integrations or reporting
By considering all the features and capabilities of financial modeling software, you can ensure you get the most value for your investments.
What Skills Do I Need To Manage Financial Modeling Tools?
Using financial modeling tools requires a specific set of skills. You need to be knowledgeable in basic accounting, have the ability to interpret financial statements, and know the fundamentals of economics.
Additionally, you should possess strong analytical skills to create accurate and comprehensive financial models. To interpret and communicate the data generated by the financial model, you'll also need to have a thorough understanding of financial concepts, such as cash flow and rates of return, and how to apply them toward effective decision-making.
You won't gain any advantages from a financial model unless you understand what data you need and what the numbers mean. Knowing which data to include in your financial model and how to interpret the results is vital in gauging your startup's financial health.
For example, suppose you have an e-commerce business. Since you'll likely be spending a lot on online marketing efforts, you should include not just revenue growth and cost of goods sold in your model but also customer acquisition costs and the ROI of your ads spending. You'll also need to know how to interpret this data over time so you can decide whether you need to change your marketing tactics and budget.
Having a basic understanding of accounting is essential when using financial modeling tools. This includes having a solid understanding of the principles of accounting and the standards of the field. For example, if you're raising capital, you'll need to follow Generally Accepted Accounting Principles (GAAP) to report your financials to potential investors accurately.
Organizing the financial data for your startup is critical for accuracy and clarity. Attention to detail is vital when preparing financial models, as errors can lead to inaccurate results. A well-organized financial model will better equip your startup to make data-driven decisions.
For example, if your startup is in a growth stage, you'll need to accurately project your revenue and expenses to determine if you need additional funding.
Although you don't need to be an expert in spreadsheets, having a basic understanding of the fundamentals is essential. Knowing how to use formulas, create graphs and charts, and input data correctly into a spreadsheet will make your financial modeling process much more efficient.
Knowing When To Ask For Help
As you become more experienced in financial modeling, you may find that specific tasks are too complex or time-consuming to handle. In these cases, it's best to seek help from a professional. Fractional CFO services can advise and help founders build financial models and provide other valuable insights into their businesses. By outsourcing more sophisticated analytics, you can free up time and resources better spent on other crucial aspects of your business.
Should I Do It Alone?
As a startup, you may think you can go it alone when it comes to financial modeling. However, long-term business growth relies upon the ability to analyze large amounts of complex data. As your business grows, financial modeling becomes more difficult to manage and analyze.
Many startup founders face a lack of skills and resources to create financial models that work to their advantage. Accuracy and efficiency can propel any business forward, but achieving these goals can be difficult without the right tools, expertise, and support.
Leveraging the right financial modeling tools and outsourcing fractional CFO services can help your startup create comprehensive models to support your business's success. While going it alone may seem simpler and cheaper, proper support will give your startup a much-needed advantage in your financial modeling journey.