A Statement Of Cash Flows Is Not Useful For 3 Tests to Ensure a Credible Financial Model for Your Start-Up

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3 Tests to Ensure a Credible Financial Model for Your Start-Up

Building a good financial model is not easy but raising capital for your business is just as important. Many companies spend many hours getting their financial models right. Because – – – To provide potential investors with information about the company’s projected financial performance and to demonstrate that the strategy (ie, the use of dollars for things like marketing, inventory, or staffing) translates into financial benefit to potential investors in hopes of obtaining investment. A reasonable period for that particular industry.

The model should provide details of the bigger picture the company is pitching. It is important to fully understand the key assumptions of the financial model as well as communicate it to potential investors. Additionally, if you don’t make sense to the key driver investors, your pitch won’t be considered credible. To ensure that your pitch is credible and that your financial model makes sense, check the following points when your model is complete before sending it to anyone externally.

First test: Make sure the cash flow makes sense

In your cash flow model, you need to determine when cash is actually received from sales and when expenses are paid, rather than when they are earned. Many models assume that the business gets paid at the same time as a sale occurs. However, this may be the case for brick-and-mortar retail stores that are customer-oriented but do not use third-party sales portals to hawk the online retail store’s products. A third party may wait 30-days or longer to pay for a sale. Meanwhile while you wait for those funds, employees need to get paid and other bills are coming in the mail. Your cash flow statement and balance sheet should account for cash inflows and outflows. By including this information, you show potential investors that you understand cash flow and aren’t a total idiot.

Second test: You don’t have an income tax account

Most models for early-stage or start-up companies show significant losses in the first years of business operations. Losses accrue over the years, with no tax liability. However, when you start making profits, there may or may not be a tax liability for the first several years depending on the previous losses. Be sure to factor in your net operating losses from early years when calculating future tax liabilities in profitable years.

Taxes can be complicated so be sure to speak with a tax professional to understand your state and federal tax obligations as well as the standard tax rates for your industry.

Third Test: Sales forecasts are based on reliable data, not market percentages

From an investor presentation point of view, it makes sense to present your business with a certain percentage of market share over a period of time to give the investor an idea of ​​the size of the opportunity. However, you shouldn’t build your business model on a percentage of the market assumption.

Sales should be calculated from a bottom-up approach. This means measuring your sales based on your sales process and cycle. If you’ve done a good job of creating your key drivers (i.e. assumptions) of your business model, this shouldn’t be difficult to do. Examples of key drivers include:

  • How long does it take to close a sale?
  • What is the potential per sales person to reach leads?
  • What percentage of leads convert to sales?
  • What percentage of online referrals convert into paying customers?

The list could go on but it depends on knowing your sales process and cycle to make it reliable.

At the end of the day, you are selling yourself and the company to investors. You need to understand the key drivers of your business model and explain them both strategically and financially. If you need help with the financial part, get help. You want to be credible to potential investors.

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