Ultimate guide on financial modeling for startups in Singapore
Throughout the world, there are constant fluctuations in economic activity. Some days it’s good and on other days, it’s bad. These conditions are often not in a business’s control but may directly or indirectly affect them.
Financial modeling for startup is one of the many ways to reduce risk and safeguard themselves from unforeseen events. The financial model for a company is a way to understand their standing in the business and economic environment.
It gives the organization a clear idea about where their money is spent, how it impacts their business, and whether the current course is sustainable or not.
Creating a financial model for startups is a way for finance leaders to foresee or predict the future based on educated guesstimates and financial data to determine how the business might perform in the future.
Financial modeling for startups is generally done on tools like Microsoft Excel or other complex software solutions that have more advanced features than a spreadsheet.
The way these financial models work is that they use your company’s past financial data and incorporate them within different types of accounting formulas and ratios to predict future financial performance.
Changing the assumptions/guesstimates or the financial data used will yield different results and show you possible scenarios of your company’s situation in the future.
Before a company dives deep into financial modeling, it must have all its fundamental financial information with them. These include:
These are documents that outline the financial status of a company at a given point in time.
The 3 most common financial statements are income or P&L statements, balance sheets, and cash flow statements. These documents hold a company’s financial data and show how they own and owe to other stakeholders.
Revenue in accounting terms is the total earnings a business has made before profits. In other words, it is the total sales that were made.
This figure tells a lot about the demand for your product or services, whether customers like your business, and the potential there is for you to grow.
Your growth margin refers to the amount of money that a customer pays you versus the amount you have to pay to produce and deliver your goods or services to the customer.
The higher your growth margin, the more profit you earn; you will also be able to expand your business after you have covered all costs and you have money remaining in the form of profit.
Operating expenses refer to every penny that is spent to sell a good or service. These expenses are also linked to your growth margin. The higher your operating expenses, the lower your growth margin and profitability.
Money is required to run the daily operations of a business. The amount of cash you have to run day-to-day business operations is known as working capital.
Your revenue should always be higher than your working capital and expenses. Else, your business will be at a loss.
Money taken in the form of loans or equity from banks or investors is part of the investment that has been made in a business. A company must be able to tell how quickly and how much returns can they give their investors as part of their financial modeling.
Out of all the different financial modeling for startups, the three-statement model is the foundation for all other financial models. It uses the 3 financial statements i.e. the income statement, balance sheet, and cash flow statement.
Each statement tells a different financial aspect of the company. The cash flow statement shows the money going in and out of the business. The income statement outlines the revenue and expenses.
And the balance sheet tells the assets and liabilities of your company. Using all this data, educated assumptions, and Excel spreadsheet-based formulas, you can determine financial projections for your company.
This financial model is a method through which companies estimate the value of an investment based on the cash flow that it is expected to bring in the future.
DCF analysis is useful for managers and business owners to understand and make decisions regarding budgeting and capital expenditures.
A merger refers to two companies coming together to form a single entity.
The steps involved in a merger financial model include making assumptions about the acquisition/merger, making projections based on the financial data from both entities, figuring out the valuation of each business, combining the businesses, making pro forma adjustments, and the final dilution of a company into another or the deal accretion.
Long-range forecasting is a strategic model that analyzes the impact of different initiatives within a company in the long term.
An example could be a company determining whether starting operations in a new market would be feasible or not depending on the potential costs and revenue it will generate.
This will help your business understand whether pursuing a particular project is worth the financial investment and risk or not.
This type of analysis is done by companies when they want to see the effect on their business when one variable changes in the equation.
This can be anything from the price of goods, increase or decrease in demand, manufacturing costs, supply chain costs, etc.
This model tries to see the change in a business’s financial performance and how sensitive it is to these changes, which is why this model is also called sensitivity analysis.
This type of financial model for startups is similar to a ‘what if’ analysis, except that in this case, any number of variables can change and its financial impact on the business is measured.
This type of analysis looks at past events to predict the future and bring out different scenarios with the three major ones being a normal or base scenario, a best-case scenario, and a worst-case scenario.
One thing that might never change is that finance is the lifeblood of any business. And a healthy business is in a positive financial condition or is predicted to perform better in the future.
Financial modeling for startups helps the stakeholders gather insights that indicate the whether the business is doing well or not.
The difference between good decisions and bad decisions is the amount of insight and data you have before making one.
Financial models give you crucial financial information about the company that informs you about its current state. Knowing this helps the management make better decisions that are in the organization's best interest.
Financial modeling for startups also benefit the company by helping them make future projections. Many models involve using past data and guesstimates to predict future trends and patterns that the business might encounter.
Using a financial model for startups to calculate how much should be spent to achieve specific revenue is the best bet for companies to estimate their future earnings and profit.
Building a financial model for a startup is largely based on these fundamental steps:
The reason why you want to/need to make a financial model will determine how complex it should be. If you’re planning to raise capital, then the financial model is usually very detailed and complex.
Using industry-standard KPIs is generally the route to go as they show how your business is performing. Make sure you set KPIs that are measurable.
Starting from scratch is time-consuming. Use a template that fits most businesses and then customize it according to your needs.
Use your company’s past financial data and incorporate it within the financial model template alongside the assumptions to get the best projections.
Use the income statement to determine the projected revenue and move down the statement accordingly considering all historical numbers and assumptions.
Determine the amount you will have to spend on your workforce to reach the revenue projections. Incorporate hiring costs into your calculations.
Remember to factor in additional expenses as your company grows. The more you grow the more expenses you incur.
Figure out a good system for paying vendors and getting paid by clients to maintain positive cash flow and healthy working capital.
Review your projections and estimates multiple times alongside other management folks to make sure that you’re looking at your business and growth factors from all perspectives to make sure you haven’t missed out on anything.
Volopay is a complete expense management ecosystem that allows businesses to gain complete visibility, tracking, and control over how their budgets are spent.
Our platform enables you to streamline all expenses and gives you the ability to customize and create important financial reports for easy accounting and analysis of your financial stability.
With robust tools like corporate cards and our web and mobile app, your company can save a lot of time and money on tedious and repetitive tasks and focus on more strategic financial planning and implementation instead.