How to Build a Financial Model That Gets Funding

Securing funding is one of the most critical milestones for any startup or growing business. Whether pitching to venture capitalists or investors or applying for a business loan, a well-structured financial model is your secret weapon. It’s not just a spreadsheet with numbers; it’s a narrative that tells the story of your business, its potential, and its path to profitability. In this guide, we’ll walk you through the steps to build a financial model that impresses investors and helps you make informed decisions for your business.

And if you’re looking for additional resources, templates, or expert advice, be sure to check out the LinkedIn profile of SHEETS.MARKET. We offer many tools and insights to help you streamline your financial modeling process.

Why a Financial Model Matters

Before diving into the mechanics, it’s essential to understand why a financial model is so crucial. A financial model quantitatively represents your business’s operations, projections, and financial performance. It serves three primary purposes:

1. Attracting Investors: Investors want to see that you’ve thought through your business’s financial future. A robust financial model demonstrates that you understand your market, costs, and revenue streams.
2. Strategic Decision-Making: A financial model helps you test different scenarios, such as pricing changes, market expansion, or cost-cutting measures, to see how they impact your bottom line.
3. Operational Planning: It provides a roadmap for your business, helping you set realistic goals and allocate resources effectively.

Without a solid financial model, you’re essentially flying blind. So, let’s get started on building one that gets you funded.

Step 1: Start with a Clear Business Plan

Your financial model is only as good as the assumptions it’s built on. Before you open Excel or Google Sheets, you need a clear business plan that outlines:

• Your Value Proposition: What problem are you solving, and how does your product or service address it?
• Target Market: Who are your customers, and how big is the market opportunity?
• Revenue Streams: How will you make money? (e.g., subscriptions, sales, licensing)
• Cost Structure: What are your fixed and variable costs?
• Go-to-Market Strategy: How will you acquire customers?

These elements form the foundation of your financial model. If you haven’t already, take the time to refine your business plan. Investors will scrutinize your assumptions, so they need to be realistic and well-researched.

Step 2: Choose the Right Type of Financial Model

Not all financial models are created equal. The type of model you build depends on your business stage, industry, and the purpose of the model. Here are the most common types:

1. Startup Financial Model: Designed for early-stage companies, this model focuses on cash flow, burn rate, and funding needs. It’s typically simpler and more assumptions-driven.
   1. Operating Cash Flow = Net Income + Depreciation − Changes in Working Capital
   2. Burn Rate = (Cash Outflows – Cash Inflows) / Number of Months
2. Three-Statement Model: This more comprehensive model includes an income statement, balance sheet, and cash flow statement. It’s ideal for businesses with some operating history.
3. Forecasting Model: Used to project future performance based on historical data and trends. This is common for established businesses seeking growth capital.
4. Scenario Analysis Model: This allows you to test different “what-if” scenarios, such as changes in pricing, market conditions, or costs.

A combination of a startup financial model and scenario analysis is a good starting point for most startups. As your business grows, you can evolve it into a three-statement model.

Step 3: Build the Core Components of Your Financial Model

A financial model typically consists of several interconnected components. Here’s a breakdown of the key sections:

1. Revenue Projections

• Start by estimating your sales. Break this down by product, service, or customer segment.
• Use realistic assumptions based on market research, historical data, or industry benchmarks.
• Consider factors like seasonality, customer acquisition costs, and conversion rates.

2. Cost of Goods Sold (COGS)

• Calculate the direct costs associated with producing your product or service.
• This includes materials, labor, and manufacturing expenses.
• For SaaS or service-based businesses, COGS might include server costs or contractor fees.

3. Operating Expenses

• List all your fixed and variable operating costs, such as rent, salaries, marketing, and utilities.
• Be detailed but avoid overcomplicating. Group similar expenses together for clarity.

4. Cash Flow Statement

• This shows how cash moves in and out of your business.
• Include operating activities (e.g., revenue, expenses), investing activities (e.g., equipment purchases), and financing activities (e.g., loans, equity investments).

5. Balance Sheet

• This provides a snapshot of your business’s financial position at a given point in time.
• Include assets (e.g., cash, inventory), liabilities (e.g., loans, accounts payable), and equity.

6. Profit and Loss (P&L) Statement

• Summarize your revenues, costs, and expenses to show net profit or loss over a period.
• This is often the first thing investors look at.

Formula for Gross Profit:

Gross Profit = Revenue − Cost of Goods Sold (COGS)

Formula for Net Profit:

Net Profit = Gross Profit − Operating Expenses − Taxes

7. Key Metrics and KPIs

• Highlight the metrics that matter most to your business, such as customer lifetime value (CLV), customer acquisition cost (CAC), gross margin, and burn rate.
• These metrics help investors gauge the health and scalability of your business.

Step 4: Use Realistic Assumptions

The accuracy of your financial model depends on the quality of your assumptions. Here’s how to ensure they’re realistic:

• Base Assumptions on Data: Use historical data, industry benchmarks, and market research to inform your projections.
• Be Conservative: It’s better to underpromise and overdeliver. Avoid overly optimistic revenue projections or underestimating costs.
• Document Your Assumptions: Clearly state the rationale behind each assumption. This builds credibility with investors.

For example, if you’re projecting a 20% month-over-month growth in sales, explain why. Is it based on past performance, a new marketing campaign, or market trends?

Step 5: Test Different Scenarios

Investors want to see that you’ve thought through the risks and uncertainties of your business. Use scenario analysis to show how your business would perform under different conditions:

• Best-Case Scenario: Everything goes according to plan, and you exceed your targets.
• Worst-Case Scenario: Sales are lower than expected, or costs are higher.
• Base-Case Scenario: A realistic middle ground.

This demonstrates preparedness and helps you identify potential challenges and plan for them.

Step 6: Keep It Simple and Clean

A financial model doesn’t need to be overly complex. In fact, simplicity is key. Here are some tips:

• Use Clear Labels: Make sure every input, calculation, and output is clearly labeled.
• Organize Logically: Group related sections together and use color coding to differentiate inputs, calculations, and outputs.
• Avoid Hardcoding: Use formulas to link cells so that changes automatically update throughout the model.

If you’re not confident in your Excel skills, consider using templates or tools like those offered by SHEETS.MARKET. Our resources can save you time and ensure your model is professional and error-free.

Step 7: Validate Your Model

Before presenting your financial model to investors, validate it:

• Check for Errors: Double-check formulas, inputs, and calculations.
• Seek Feedback: Share your model with mentors, advisors, or colleagues for feedback.
• Compare to Benchmarks: Ensure your projections align with industry standards.

Step 8: Present Your Model Effectively

Your financial model is a tool to tell your business’s story. When presenting to investors:

• Focus on the Highlights: Emphasize key metrics, growth opportunities, and your path to profitability.
• Be Transparent: Acknowledge risks and uncertainties, and explain how you plan to mitigate them.
• Use Visuals: Charts and graphs can make complex data more digestible.

Final Thoughts: The Power of a Great Financial Model

A well-built financial model is more than just a requirement for fundraising—it’s a strategic asset that can guide your business to success. By following the steps outlined above, you’ll create a model that impresses investors and helps you make smarter decisions for your business.

Building a financial model may seem daunting, but it’s entirely within your reach with the right approach and tools. Start today, and take the first step toward turning your business vision into reality.