How to Create a Financial Model for a Startup: 2024 Guide

Some startups don’t have sufficient data to build a financial model. However, such startups also need financial models, especially for fundraising and mitigating risks.

So how do you build a financial model for a new startup like an eCommerce store or a SaaS business with almost zero data?

This article is a blueprint that explains how to create a financial model for a startup with or without sufficient data. We’ll kickstart with the category of startups that don’t have any business data, explaining how to acquire realistic data from market research.

It’s the same approach for SaaS, eCommerce, and other business types. While we provide a unique financial model template for eCommerce, SaaS, and other businesses, using them follows the same procedure.

How to Create a Financial Model for a Startup in 9 Steps

The path you’ll follow will depend on whether your startup has sufficient business data or not. To keep things simple, we’ll explain the steps based on these two categories of startups.

In summary, here’s a nine-step guide to creating a financial model for a startup:

1. Estimate the overall market size.
2. Figure out your share of the market.
3. Be objective with your projections.
4. Get your data ready and organized.
5. Design a three-statement model.
6. Decide what to forecast.
7. Account for the key drivers.
8. Plan the model.
9. Populate the cells.

For Startups Without Enough Business Data

As a startup without sufficient business data, you’ll make a lot of assumptions, which should be logical because investors and lenders will scrutinize your model for subjective or overly optimistic assumptions. Ideally, it’d be better to wait to gather data before building a financial model so you can reduce the subjectivity. However, if time isn’t on your side, follow these steps:

1. Estimate the overall market size.

Your first job is to find out the market size of your niche.

For example, if you offer menu design software for food businesses, what is the size of your target market?

You’ll likely start with markets closest to you and then scale up as your business grows. You can buy market reports online or use secondary data to get a reasonable estimate of your market size.

Additionally, we provide a financial model template for a business plan you can use off the shelf.

2. Figure out your share of the market.

After determining market size, estimate your market share via competitive analysis. List the big boys in your niche — those you think will compete with you the most. You can identify them from their dominant role in the niche currently.

Point out their weaknesses and strengths as well as yours, and outline how you’ll compete or even outperform them. For example, your product may have features theirs don’t, or their marketing strategies have flaws — identify all the factors that will give you an edge over competitors. This is easier for a SaaS or an eCommerce financial model for which we have dedicated templates.

Check out this insightful course, where we explain the role competitor analysis and accurate financial projections play in building a convincing pitch deck.

3. Be objective with your projections.

The steps above are the analyses that will convince investors and lenders that the future market size you’ve allocated to yourself is realistic. Be as objective as possible with your analyses because startup pitch deck mistakes like an overly optimistic forecast discourage investors.

Estimate the business’s costs before and after you achieve your market goals, then project how cash would enter and leave your account (cash flow) from these figures. This alone gives you a three-statement financial model from which you can build others. For example, you can build a SaaS financial model that forecasts subscriptions.

After obtaining substantial data from the above steps, continue with the below steps. 

For Startups With Sufficient Business Data

If you can generate enough business data from your startup, building a convincing financial model that speaks to investors and lenders becomes easier.

Here’s how to create a financial model for a startup with sufficient business data.

4. Get your data ready and organized.

Pool data for use in the input sections. We’ve already discussed how to obtain it in the above steps. Follow the steps we began with above to obtain data if you haven’t made any significant sales yet.

5. Design a three-statement model.

After getting your data, the next step is to build a financial model showing the following:

• The income statement
• The balance sheet statement
• The cash flow statement

All subsequent financial models will be derived from this base model.

6. Decide what to forecast.

There are many KPIs to forecast about a business that illuminate the financials of a startup. You may want to build a SaaS or eCommerce financial model to raise investment capital. Since investors are most interested in the future profitability of your business, designing a financial model that forecasts your future income should satisfy any investor.

7. Account for the key drivers.

If signups is the major KPI (key performance indicator) you intend to forecast in your financial model, you must thoroughly think through its driving factors (drivers). Otherwise, models predicting signups will likely be off by a wide margin. We’ve emphasized a signup example to clarify why your startup financial model should be large and feature multiple underlying factors, especially if it’s a SaaS business plan financial model.

The same logic applies to a financial model that forecasts subscriptions; you’d find a range of different factors influencing it. If one or more drivers don’t show up in your model, an investor will likely notice the omission, especially if they have seen other startup models.

So it’s pretty clear that even if you intend to track or forecast a single KPI in your startup model, the financial document will have large input sections and probably some complex calculations. Now that the importance of accounting for all factors has been established, we can move on to the next stage of our guide, explaining how to build a financial model for a startup.

8. Plan the model.

We advise that you build a modular, large model, i.e., one comprising several sub-models. But if you think such a model isn’t necessary in your present pursuit, you can build a simple startup financial model upon the three-statement financial model.

Planning your model is a step-by-step process; try to make it simple but credible.

Note that simplicity in model building doesn’t equate to inaccuracy. Similarly, complexity doesn’t mean your model will be accurate or usable. What determines the usefulness of a business plan financial model is accounting for the minimum number of key drivers, data accuracy, formulas, and realistic assumptions.

Provided you get these right, the size or complexity of your model doesn’t matter. In fact, if you ignore the size and complexity of your model while building it, you may include too many factors, leading to impractical results.

Model Outline

All models typically have three sections:

• The input section
• The processing section
• The output section

Any KPI your model will forecast should use data from the input section. If the data for the various intended forecasts vary, you must use colors to differentiate them into sub-sections of a more extensive input section. That way, whenever you want to update input data for a particular forecast, it’ll be easy to identify, saving you time and minimizing errors.

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All your financial model formulas should be in the processing section. Even if you design a modular eCommerce financial model, the formulas should be easily accessible and identifiable.

Brainstorm the formulas you’ll use in the processing section. You can do this by listing all values you’ll deduce from data in the input. For example, you may want to calculate churn, recurring revenue, growth, etc. Perhaps these variables are critical for specific formulas.

List them all down and find out the formulas for calculating them — this step will make coordinating operations in all three sections easier and minimize or even eliminate all errors.

All formulas you need are obtainable through a simple Google search. If you don’t get the complete formula, you’ll get its component with its instructions. With formulas established, your startup balance sheet and output will automatically update based on the data values entered.

9. Populate the cells.

After planning your model, the next step is to input data in the processing and input sections. This can be data pulled from your business or market research.

Keep everything about input in the same place and do the same with the processing section. Your outputs should be separated for different forecasts. It’s better to use different sheets for your outputs.

Check out our financial model template for a straightforward means of generating a financial model for your SaaS or eCommerce startup. Never worry about sourcing and entering the correct formulas or spending so much time building a financial model from scratch.

Frequently Asked Questions

What are the elements of a startup financial model?

The three major elements of a startup model are an income statement, a startup balance sheet, and a cash flow statement. An in-depth, objective analysis can produce reasonable estimates for all three statements, regardless of whether there’s significant data on your operations or not. Any forecasting afterward should stand on this three-statement model.

How do you prepare a financial model?

You can prepare a financial model for your startup by following these nine steps:

1. Estimate the overall market size.
2. Figure out your share of the market.
3. Be objective with your projections.
4. Get your data ready and organized.
5. Design a three-statement model.
6. Decide what to forecast.
7. Account for the key drivers.
8. Plan the model.
9. Populate the cells.

Our financial model template makes this process as seamless as possible for your eCommerce or SaaS startup.

What is the financial model for startup funding?

A financial model for startup funding is a spreadsheet built on Microsoft Excel, Google Sheets, or similar applications that shows investors and lenders the ability of your business to make money in the future. This statement is critical to raising funds for your startup, as it predicts the financial future of your business. Without such a forecast, investors won’t have the motivation to fund your startup.

What is a financial model template?

A financial model template is a spreadsheet designed to forecast the financials of a business through calculations and assumptions. This document is ready-made and requires data input on your part to display results. You neither have to design the input, processing, or output section nor worry about entering the correct formulas.

Conclusion

In this article, we’ve seen an outline of how to create a financial model for a startup. Follow these steps, and your financial model will make sense to any investor or employee, provided they know how to validate it. If you face any difficulty building a startup financial model, contact us for help, or check out our startup financial model template for a faster and more feasible design.

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