Financial model templates can be a very attractive solution for most entrepreneurs who need to project their financials. A financial model is used for a number of cases. They can be used when raising capital (in an investor presentation or business plan) but they are also paramount in a business’ ongoing finances (financial planning).
Because most startups and small businesses need financial forecasts when raising capital from investors, using a pre-built template can be a convenient solution. Unfortunately, not all templates are good, and there are cases where you should build you own.
In this article we will cover everything you should know about financial model templates for startups and whether you should use one.
What is a financial model template?
A financial model template is a pre-built spreadsheet that allows a business to project its financials in the future. Typically we estimate financials using a number of drivers that allow us to calculate revenues and expenses over a period of time (typically 3 to 5 years).
Instead of building their own financial model (or “financial plan”, “financial projections” or “financial forecasts”) from scratch, entrepreneurs and startups in general often use templates. Indeed most businesses share common characteristics such as the revenue model or the expenses themselves. As such, instead of reinventing the wheel, and potentially avoiding a few mistakes, we use templates built by experts and vetted by multiple businesses in the past.
Yet, not all financial model templates are good to use, indeed many templates (both free and paid) lack key components. Let’s see together what a good template should include and why it is important.
What should a template include?
Any financial model must include key components you will need for your budget and/or your business plan or pitch deck. We have listed below all the must and nice-to-have features a template should include and why.
Any basic financial model template should include all the features below. Whilst it will not be sufficient enough for a fundraising and/or your budgeting needs, such template is sufficient for pre-revenue startups which need to assess their business profitability.
- Operating model: the month-by-month calculation of revenues, expenses and any other cash items. From the operating model we derive the 3 financial statements (P&L, balance sheet and cash flow statement)
- Profit-and-loss: consolidates all revenues and expenses over a period of time (usually represented on an annual basis, it should also be represented on a monthly basis)
- Balance sheet: the position of your company’s assets and liabilities over time
- Cash flow statement: includes all the cash inflows and outflows (some P&L items aren’t necessarily cash) hence this is the most important statement when considering runway and fundraising for a startup. Like the P&L, should be annual and monthly
The must have
- Metrics: exhaustive list of financial and operational metrics over time. A few examples are: Customer Acquisition Cost, Customer Lifetime Value, Conversion rate, etc
- Charts: visual representation of your financials and metrics (bar charts, pie charts, etc.). These can easily be plugged in onto a presentation (business plan or pitch deck) for instance
- Settings: the best templates include all the key assumptions that drive the entire financial model in one sheet only. This can be seen as your “cockpit”. No need to dig into multiple sheets, from there you can easily change any assumptions and see the impact on your financials and metrics
- Cash burn analysis: where will you spend your money in the next 12 or 18 months? What is your runway if you raise $1M vs. $2M? All these questions can be answered thanks to the analysis of your financial statements, yet the dashboard needs to be flexible so you can plug-and-play with different numbers and assumptions
- Sensitivities: usually they are a number of key assumptions that you can set at different levels to see the impact on a number of financials and metrics. For instance: what is your revenue in 2022 if conversion rate is 1%, 2% and 3% respectively? When do you become profitable if your average order value is $100, $120 or $150? They can either be built within the Settings sheet itself, or on a different one
- Cap table: the evolution of your business’ equity ownership over time, factoring in the different fundraising rounds you might do in the future
- Comparison vs. reporting: if you use your financial model as a budgeting tool as well, you will need to build your reporting export (from Xero, Quickbooks, etc.) into your financial plan. That way, you can compare whether you are performing better or worse than expected and identify the pain points
When do we use it?
Financial models are used for 2 main reasons:
When you need to raise capital
Whether you are applying to a government grant, crowdfunding platforms or seeking venture capital, you will need to produce a business plan. Usually, startups produce a pitch deck in Powerpoint format instead of a word document business plan. In any case, your document will have to include your projected financials.
For more information on fundraising, read our articles on how to pitch your financial projections, the key financials and metrics you should include in your pitch deck and why you should have a rock-solid financial model for your fundraising.
As a budgeting tool to better manage your business
A great financial model will allow you to make better decisions:
- Before you launch: which pricing should you set for your products / subscriptions? How many customers can you expect to acquire with $100k digital marketing budget? How many recruits will you need to service 200 orders a day? Etc.
- When operating your business: is your paid acquisition strategy profitable (think CAC and LTV)? What is your runway (the number of months you can survive with the current cash balance) if you recruit 5 other employees? Etc.
Financial model templates: pros and cons
- You might save time and effort using a template. As explained earlier, whilst they are all unique, most businesses share common characteristics that makes templates helpful: no need to reinvent the wheel and build a SaaS revenue model for instance
- You will avoid mistakes: most templates (free and paid) have been designed by finance experts who have experience building such forecasts. Indeed, it can be very easy to make mistakes when building comprehensive financial forecasts in a spreadsheet. Great model templates are error-free as they have been tested by multiple companies and constantly reviewed by their authors
- Financial statements are pre-built. Forecasting revenues and expenses can be easy for basic projections. The consolidation of your operating model into your P&L, balance sheet and cash flow statement is not straightforward though. Because investors will ask for it, using a template that consolidates automatically your forecasts into financial statements is very convenient for most people
- Additional features for fundraising and/or budgeting are pre-built. Having the ability to enter your assumptions and obtaining your key metrics evolution, cap table and cash burn analysis automatically is a big plus. You may need these for any fundraising hence having them already built will save you a lot of time and effort. Also, you will be prepared when approaching investors as you will be able to answer most of their questions.
- Generalist templates are too basic. Whilst most business share common characteristics (revenue model or expenses for instance), not all businesses can use the same template. Also, generalist template will lack the business-specific metrics and financial investors may ask you
- Most templates aren’t fully flexible. As such, they often do not allow for customised inputs and assumptions. You should avoid any template whereby you need to plug in the revenues yourself: this is not forecasting
- Templates still require good finance knowledge. Whilst the mechanics are pre-built, you will have to enter your assumptions to customise the template to your business. And if you want to amend the template (to add another revenue stream for instance), you will need a solid grasp of Excel modelling
And for those who wondered: unless you are an experienced finance professional, do not try to use a basic template to build in customised features and additions on top. This is the perfect recipe for mistakes.
Should you use it for your business?
Unless you are a finance wizard, we recommend using a template to project your financials and include in your business plan.
The other solution is to hire a consultant to build a custom model for you, but it will very likely cost you $1,500 minimum for a decent financial model. Also, not all custom made financial model are good, be careful when requiring custom services on freelancers platforms (e.g. Upwork is a good option) as some consultants may use generic templates to save time.
Yet, not all financial model templates are good to use. If you download a template, be sure to use a template that suits your business. For instance, download a ecommerce template if you want to build projections for your online store business. That way, you will save a lot of time building the mechanics yourself and, if you choose a great template, you will even get guidance on how to customise it. At SharpSheets, we provide free tutorials and videos so you can make the most of our templates.
As such, you can learn a great deal about your business and its financial intricacies by building projections using a template. Also, when choosing a template, be sure to look at the features it includes. Do you need a simple yet flexible template to assess your business’ profitability? Or you want a comprehensive model including all your metrics, charts and sensitivities for your fundraising?
Also, be sure to check out our free resources and guides on our blog, especially: