Why Build a Financial Model?
Every semester, I teach a financial modeling course for startups at the NYU Berkeley Center for Entrepreneurship.
In it, this is the first thing I address:
Why the heck would anyone want to build a financial model?
For many students, the answer is this:
Because someone told me I had to
Because I’m a small business owner and my advisor recommended it
Or a banker told me I needed one as part of a business plan for a loan
Or I’m a startup and I have to build one to get investors
But here’s the thing:
If one of the above is your main reason for building a financial model, you're setting yourself up to build a terrible model that wastes a lot of time.
Why?
Because financial models aren’t for those other people:
They’re for YOU, the founder.
Done well, a financial model:
Helps you understand your business drivers - what areas of focus actually matter for your business
Let’s you test drive what it’s like to run a new business or to make a change (like a new hire or project) before you spend a dime
Helps you make clear-eyed decisions with limited information about potentially life-changing scenarios
Allows you to predict the future in your business so you can prepare and set yourself up for success
And finally, it teaches you how every part of your business impacts the bottom line.
Sounds pretty great, right?
Okay, so here’s the catch:
To truly realize all those benefits to the full extent, there’s a cost…
…You have to build the model yourself.
Now, I know you’d rather find a template online, I know you’d rather use some software, I know you’d rather just hire someone.
But if you do that,
You’ll miss out on the core benefits
That building a financial model
Provides to business owners.
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