Why financial modeling is crucial for a venture’s success

A great idea coupled with excellent execution leads to a successful outcome.

For a venture, this is an undeniable fact as the businesses require robust execution to ensure growth and profitability.

A major reason for the failure of startups is lack of proper money management — that is poor cash flow management, lack of financial plans & discipline, and inefficient foresight of costs.

Earlier, in India, startups had to deal with a lack of enough capital and a cash crunch. But now, with the development of the whole ecosystem, ample funds are available at startups’ disposal. Indian Startups have raised a record $42 billion in the year 2021 alone.

The startups are now flushed with cash; What next?

The ample cash pile requires them to be financially prudent while using the investor’s money.

Endless cash burn without the visibility of earnings or growth would result in an unsustainable business model that might end the startup’s journey but also make investors wary about other startups. Affecting the whole ecosystem.

A financial model helps startup entrepreneurs keep a tab on the finances of the startup.

Better visibility of cash flows

A financial model consists of a detailed analysis of future revenue and costs; capital expenditures and working capital requirements. The three-statement financial model includes forecasts for revenue drivers, cost drivers, potential investment requirements, and capital structure. This leads to getting a reasonable idea about the cash flow positions well in advance. An entrepreneur having this information at her disposal is likely to make better decisions — financial and operational

Strategy

Startup entrepreneurs find themselves handling multiple aspects of their business daily; when the focus is on urgent tasks, the not-urgent-but-important ones are often overlooked. A financial model requires an entrepreneur to brainstorm potential revenue growth areas and build out estimates of attaining the objectives. By taking a structured thinking approach to building out the financial model, the business goals and strategy get further refined.

The basis for fundraising

During investor roadshows and capital raise activities, a financial model acts as a bible for the startup team. All the information, past successes, plans, business moats, and execution capabilities are depicted in the financial model as it has all the numbers to back up the claims. A well-thought-out financial model will be appreciated by banks and investors; depending on your target funding sources. An entrepreneur can therefore focus on her journey of fund-raising (equity or debt), with a greater level of clarity.

Monthly review and Investor reporting

A financial model also forms the basis for monthly review reports and investor reports. Since the financial model has all the numbers and details related to the business KPIs, this information can be used for depicting the trends related to important aspects of the business. An investor or top-level management can therefore focus on the things that matter the most, and have the option of deep dive into any particular aspect using the financial model.

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We at Namo Advisors regularly engage with startups and small businesses to build out a tailored financial model, taking into consideration all the nuances of your business and the peer information. We create a meticulous financial model for you, with an option for regular review, so that you are on top of your business growth journey and can review your growth.

To know more about how we can help you, write to us at info@namoadvisors.com or visit https://namoadvisors.com