How to create a financial model for startups

Definition of the startup financial model

Definition of the startup financial model


A startup financial model is a tool to forecast the financial performance of startup companies.

It helps to understand how to improve main financial indicators, like revenue or profit. It also can be used as a plan to achieve financial goals.

The model is based on historical data (if available) and assumptions about the future.

The purpose of the financial model for startups

The purpose of the financial model is:

  • to have a financial plan;
  • to understand the financial prospects of the company;
  • to predict the company’s cash flow, profitability, and other financial metrics;
  • to assess the financial impact of different business decisions;
  • to attract investments.

I like to create financial models with the business owners or the company’s manager. After finishing the preparation of the financial model the business owners or the company’s manager have a lot of ideas about what can be improved to achieve the higher profit. We can do it in a few hours: to see how suggested ideas influence profit growth.

The Important step here is to understand what types of activities and products give the most of the income and the profit. At the same time, what types of activities and products just waste your time and create a small part of the total income and the profit.

So, it is an amazing process for me to analyze different financial models. It is one of the main goals of the financial model creation.

Let’s describe step by step how to create financial models.

The simple financial model for startups includes:

Example of a simple financial model for startups
  1. Initial data ( Assumptions of the project).
  2. Financial calculations of revenue, expenses, and profit. All this information can be seen in the Profit and Loss forecast (P&L).
  3. Investment calculation.
  4. Financial analysis: calculation of financial KPIs. They can help to understand business owners and investors the risks and potential rewards of investing in a startup.

A financial model for startups can be prepared in Excel or Google Sheets. In my experience, other special software is rarely used for this.

Let’s consider each element of the financial model in detail.

1. Initial data of the startup financial model

The key inputs are all necessary numbers to create a financial model for startups. This is the initial information that will be used to create a profit and loss forecast.

Assumptions for a startup financial model

The key inputs of the financial model include:
1.1 For revenue calculation:
– list of goods or services for sale (hereinafter – ‘Products’);
– prices of your products;
– the volume of sales forecast for each product;
1.2 For expenses calculation: list and amounts of monthly expenses;
1.3 Investment calculation necessary for the launch or development of the project. It can be equipment, furniture, computer hardware, vehicles, tools;
1.4 Other important data for the project.

2. Profit and loss forecast as a main part of the financial model for startups

profit and loss forecast as a part of a financial model for startups

Profit&Loss forecast is a main part of the financial model for startups. It shows a forecast of the main financial data:

  • revenue;
  • cost of goods sold;
  • monthly expenses;
  • profit or losses.

The profit and loss forecast is usually created for 3 years. But it can be prepared for a longer period ( 5 or 10 years), based on a request of owners or investors.

A detailed explanation of how to create a profit and loss forecast can be found in this article: Learn to Make Profit and Loss Forecast with Free Template.

3. Investment calculation for the financial model for startups

Investment calculation for a startup financial model

Usually, the initial investment includes equipment, furniture, computer hardware, vehicles, and tools which should be bought at the beginning of the project.

In addition to this amount, it is necessary to add the amount of losses, that should be covered by a business owner till the project profitability.

But if you have an IT project that doesn’t need a lot of equipment or tools, initial investment equals only total losses before the project becomes profitable. In this case, to see the total amount of the initial investment, the profit and loss forecast is necessary.

4. Financial KPIs for the financial model for startups

Financial KPIs help to understand the financial performance of the project and can help to compare different projects.

The basic financial KPIs are:

  • ROI;
  • Revenue and profit growth;
  • Payback period;
  • Profitability;
  • Break-even point.

The detailed calculation of the Financial KPIs is described in the article: Financial Analysis for Startups.

An analysis of the financial model is an important step. You can understand here if your expectations of the business income, profit, and profitability are realistic; and if your business can earn the money you expect.

To understand it, answer the following questions:

  • How much money do you want to earn from your business per month/quarter/year? If this amount approximately equals the net profit for the corresponding period, you are on the right way.
  • How many products your company can sell per month/quarter/year? What selling volume is realistic? Check how it corresponds with the selling volume in the financial model.
  • What are the selling prices of your products/services? Are they in the range of competitors’ prices? Compare your real selling prices and the prices in the financial model. They should be the same or similar if you plan to update the prices of your products/ services.
  • Can you increase prices to improve the business profitability? Compare prices of your products/ services and competitors’ prices. If it is necessary, update prices in the financial model.
  • Can you decrease monthly expenses to improve the business’s profitability? Check line by line monthly expenses in the financial model and think if they can be decreased. If it is necessary update then the financial model for startups.

Example of the simple startup financial model

Here is an example of a simple financial model.

  1. Initial data (assumptions)
    Price per unit = $ 100
    Quantity of sales: Year 1: 500 units, Year 2: 700 units, Year 3: 900 units
    Cost of sales, per unit sold (variable costs): Year 1: $30,0, Year 2: $28,6, Year 3: $27,8
    Fixed costs: Year 1: $25 000, Year 2: $35000, Year 3: $45000
  2. Profit and loss forecast (P&L)
Financial indicatorYear 1Year 2Year 3
Revenue50 00070 00090 000
Cost of sales / Cost of goods sold15 00020 00025000
Gross Profit35 00055 00065 000
Fixed costs25 00035 00045 000
Net Profit10 00020 00020 000
  1. Investment calculation
    The total amount of investment for this project consists of furniture, tools, and equipment and equals $50000.
  2. Financial analysis
    • Revenue growth: Year 1-2: 40%; Year 2-3: 29%
    • Payback period: 3 years
    • Profitability ( Net Profit to Revenue): Year 1: 20%, Year 2: 29%, Year 3: 22%
    • ROI = 100%.

More examples of online financial models for startups =>

Conclusions: how to create a financial model for startups


  • A simple financial model for a startup usually consists of initial data (assumptions), financial statements ( profit and loss forecast, investments calculation), and financial analysis ( calculation of profitability, payback period, ROI, etc.).
  • The initial data ( assumptions) should be prepared carefully based on historical data, available resources analysis, and competitors’ prices and products. In this case, the financial model will be more realistic. It is the basis of the financial model.
  • The financial model can be created in Excel, Google Sheets, or using different special software. The most common is using Excel and Google Sheets;
  • The period of data forecast is usually 3-5 years. Detailing can be done on a monthly basis for the first years, and for the rest – on a year basis.

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