How to build a financial model for a startup sounds complicated. But honestly? It’s just figuring out if you’ll run out of cash next month or have six months of runway. Most founders think financial models are for investors. Sure, VCs want them. But you need one more. It tells you if your business idea makes money or if you’re just burning cash.
Why You Actually Need This
Say you’re hiring three engineers and spending $50k on marketing next quarter. Can you afford rent? The model tells you before you blow all your money. Investors use them to decide if you’re worth betting on. A solid financial model for a business plan shows you’ve thought through how money flows.
The Three Statements
- Income statement: revenue minus expenses. That’s your profit or loss.
- Cash flow statement: actual cash moving in and out. This matters most because you can be “profitable” on paper but still run out of cash to pay bills.
- Balance sheet: what you own versus what you owe at one moment in time.
These three connect. Change one number, and the others change too.
Revenue Projections Without Lying
Here’s where founders mess up. They get optimistic. You think you’ll land 50 customers next month. Reality? Maybe 10. Build revenue from the bottom up. Figure out your actual sales process. How many leads are needed to close one customer? What’s your conversion rate? Average deal size? Multiply those real numbers. Got existing sales data? Use it. Pre-launch? Research competitors. Talk to potential customers about what they’d pay. Build three scenarios – base, worst, and best. Most founders only build the best case because it feels good. Don’t.
Fixed vs Variable Costs
Fixed costs stay the same no matter how many customers you have. Rent, salaries, insurance, and software. These make up your burn rate. Variable costs change with sales. Payment processing, shipping, and customer support as you scale. This split helps you figure out break-even. When revenue covers costs and you stop losing money every month.
Cash Flow Kills Companies
82% of US business failures happen because of cash flow problems. That should scare you. You can be “profitable” but go bankrupt if customers pay slowly and you have to pay bills now. Track when money hits your bank versus when invoices go out. Invoice someone in January, and they pay in March? That’s a two-month gap where you need cash from somewhere. Model cash flow monthly minimum. Weekly is better in the early stage.
Use a Template
Don’t build from scratch. Waste of time, and you’ll mess up formulas. Use a financial model for the startup template. Free ones everywhere. Y Combinator has one. SaaS companies have specific ones. Download a template matching your business model. Customize it. All the formulas are already connected. How to build a financial model in Excel – make sure you get how formulas work. Don’t change numbers without knowing what breaks. Google Sheets works too. Multiple people can access it without emailing files back and forth.
Time Horizons
VCs want three- to five-year projections. But three-year projections for pre-revenue startups are fiction. Nobody knows what’s happening that far out.
- Build detailed models for the next 12 months. Go month by month.
- Years two and three? Go quarterly. Less detail. You’re showing direction.
- Update quarterly as things change. Your six-month-old projections are already wrong. Models aren’t about being right; they’re about making better decisions.
Hiring Costs
Salaries are usually your biggest expense. Don’t put “engineers: $500k” in a cell. Break it by role, timing, and loaded cost. Loaded cost means salary plus benefits, payroll taxes, equipment, and software, meaning it includes everything. Usually 1.3x to 1.5x base salary. Model when you hire each person. Engineer in March? That’s only 10 months of salary in year one, not 12.
Marketing and CAC
How much to get a customer? That’s CAC (customer acquisition cost). Spend $10k on ads, get 50 customers? CAC is $200. Then figure out LTV (customer lifetime value). Want LTV at least 3x your CAC. Does $200 to get a customer who pays $300 total? You’re losing money on every sale. Model marketing spend by channel. Track which channels work and which burn cash for nothing.
How to Build a Financial Model for a Startup: Online Tools
Excel and Google Sheets work fine. Want something fancier? Tools like Causal, Finmark, and Jirav connect to your accounting software and update automatically. Downside? They cost $50-$200/month. Early stage? A free template gets you 90% there. Investors prefer Excel files they can dig into anyway.
Mistakes to Avoid
- Don’t forget taxes. Profitable means paying corporate income tax.
- Don’t ignore one-time costs. Moving offices, legal fees, and equipment purchases hit cash flow hard.
- Don’t assume smooth growth. Some months you crush it, others you miss targets.
- Don’t build it and forget it. Update monthly with actual results. Compare projections to reality.
- Don’t make it complicated. Investors want to get your model in 15 minutes.
Also Read: Who’s Actually Going to the 2026 FIFA World Cup Then
Scenario Planning
Build multiple versions.
- Base case: what you think will happen.
- Downside: revenue 30% lower? CAC 50% higher? Key engineer quits?
- Upside: what if things go better?
If the downside shows you running out of cash in eight months, you need to raise money, cut costs, or hit higher revenue.
Using It for Fundraising
Your model tells investors how much you need and what you’ll do with it. Don’t say, “We need $2 million.” Show exactly how that $2 million extends the runway, gets you to key milestones, and sets you up for the next round. Break down the use of funds. $800k engineering, $400k marketing, $300k operations, $500k buffer. Show when you’ll hit profitability or need to raise again. Defend every assumption. Why 5% conversion rates? Where’d pricing come from? How’d you calculate churn?
Bottom Line
How to build a financial model for a startup comes down to this: be honest, use real numbers, and update constantly. Your model won’t be perfect. Nobody’s is. Forecasting’s hard when everything’s changing. But a rough roadmap beats flying blind. You’ll know when you’re about to run out of cash. You’ll know if that marketing spend makes sense. You’ll know if hiring breaks your budget.
Start with a template. Customize for your business. Keep it simple. Update monthly. Founders who make it aren’t the ones with perfect models. They’re the ones who build decent models, track actual performance, and adjust when things don’t go as planned. Download a template today. Plug in your numbers. See what the math says. You might not like it, but it’s better to know now than six months from now when you’re scrambling to make payroll.
💬 Comments