Many entrepreneurs try to avoid this important area, and this result in a bad and surprising cost reality, and investor’s expectations. Sometimes, they think that financial projections are usually invented numbers for many investors. But in reality, it is just like jumping in the car for a long and hard drive without thinking about the destination. There are chances that you won’t enjoy the success.
What is the Concept of Business Financial Model?
In many cases, it is generally a Microsoft Excel spreadsheet which is loaded with all the cost and revenue projections for the startup, starting on time and extending up to five years into the future. To add more value, a few variables can also be added, like the growth rate of product volume, and a number of salesmen, to analyze “what if”.
Why? This is all about making decisions and manage all the business – because we are the mere mortals and it is really impossible to keep all the figures and calculations in our head – deciding when your business will earn a profit that gives rational projections of all the costs and income. Secondarily, it is needed for potential investors to validate and check how much money you required to get started, as well as how much return those investors expect on the investments.
When? The model should be running just before you incorporate your business and build prototype products, of course, you will not start your ride without deciding where you want to go. If you do not set the objective, then do not try to approach potential investors unless and until you have a working model – investors have some tolerance for the startups which have no financial plan.
How? Get started with a sample business model, which is available in a general form or also customized for particular industries, and from multiple internet sources.
If you do not have enough computer knowledge like in Microsoft Excel, your main task is to find a person who is an expert and can convert your set of costs and revenues into formulas, cash flows, and a profit/loss statement.
In fact, this is the easiest part. The more critical is defining the business model which includes assembling the real variables of your business, staffing requirements, pricing assumptions, sales costs, marketing costs, and revenue flows.
The business model can also be used for different purposes, such as projecting the assumption values that are based on existing market condition, risk and profit assessment, calculating margins required to avoid adverse conditions, and various other types of sensitivity analysis. These are required to estimate investment requirements, measure financial performance, and plan capital allocation.
Creating financial projections allows to see strengths and weaknesses in your business model, and enabling you to make important changes that allow the business to run smoothly.
As people start a business due to many reasons behind, making money is very important. Even a nonprofit will not afford to lose money. Until you build your financial model with related financial projections, you won’t know if you are able to meet these expectations or not.
It would be a great learning experience. You can do it yourself, but never ever hesitate to ask for help whenever you need. You will come to know how close the relationship between pricing, volume, and the cost is. When you lose money on such items, it becomes critical to make it up.