Startup Financial Model Guide: Build Your First Model

Every investor will ask for a financial model.

Most founder models are bad. Here's how to build one that's actually useful.

What Is a Financial Model?

A financial model is a spreadsheet that projects your company's future finances:

• Revenue projections
• Expense forecasts
• Cash flow
• Key metrics

It's not about predicting the future perfectly—it's about showing you understand your business.

Core Components

1. Revenue Model

How do you make money?

SaaS Revenue Model:

MRR = Customers × Average Revenue Per Customer
ARR = MRR × 12

Include:

• New customer acquisition (by month)
• Churn rate
• Expansion revenue
• Pricing tiers

Example:

| Month | New Customers | Churn | Total | ARPU | MRR | |-------|---------------|-------|-------|------|-----| | Jan | 50 | 0 | 50 | $100 | $5K | | Feb | 60 | 3 | 107 | $100 | $10.7K | | Mar | 75 | 5 | 177 | $100 | $17.7K |

2. Cost Structure

Fixed Costs (don't change with revenue):

• Rent
• Base salaries
• Software subscriptions
• Insurance

Variable Costs (scale with revenue):

• Hosting/infrastructure (per user)
• Payment processing fees
• Customer support
• Sales commissions

Semi-Variable:

• Marketing (can scale up/down)
• Contractors

3. Headcount Plan

Your biggest expense. Break down by:

| Role | Salary | Start Month | Monthly Cost | |------|--------|-------------|--------------| | Engineer #1 | $180K | Month 1 | $15K | | Engineer #2 | $170K | Month 3 | $14.2K | | Sales Rep | $120K + comm | Month 6 | $10K base | | Designer | $150K | Month 9 | $12.5K |

Load for:

• Benefits (20-30% of salary)
• Payroll taxes (7.65%)
• Equipment ($2-3K per person)

4. Cash Flow

When does money actually move?

Cash In:

• Customer payments (consider collection time)
• Investment rounds
• Loans

Cash Out:

• Payroll (every 2 weeks)
• Vendors (net 30-60)
• One-time expenses

Net Cash Flow = Cash In - Cash Out

5. Key Metrics

Track monthly:

| Metric | Formula | |--------|---------| | MRR/ARR | Recurring revenue | | Burn Rate | Monthly cash spent | | Runway | Cash / Burn Rate | | CAC | Sales + Marketing / New Customers | | LTV | ARPU / Churn Rate | | LTV:CAC | LTV / CAC | | Gross Margin | (Revenue - COGS) / Revenue |

Building the Model

Step 1: Start with Revenue

Bottom-up approach (preferred):

1. How many leads can you generate?
2. What's your conversion rate?
3. What's your average deal size?
4. What's your churn rate?

Customers(month) = Customers(prev) + New - Churned
Revenue(month) = Customers × ARPU

Avoid top-down: "We'll capture 1% of a $10B market" is lazy and unconvincing.

Step 2: Model Expenses

By category:

| Category | Month 1 | Month 6 | Month 12 | |----------|---------|---------|----------| | Salaries | $30K | $80K | $150K | | Hosting | $500 | $2K | $8K | | Marketing | $5K | $15K | $40K | | Office | $0 | $3K | $5K | | Other | $2K | $5K | $10K | | Total | $37.5K | $105K | $213K |

Step 3: Calculate Burn and Runway

Net Burn = Expenses - Revenue
Runway = Cash Balance / Net Burn

| Month | Revenue | Expenses | Net Burn | Cash | |-------|---------|----------|----------|------| | 1 | $5K | $37.5K | $32.5K | $967K | | 6 | $50K | $105K | $55K | $750K | | 12 | $200K | $213K | $13K | $400K |

Step 4: Create Scenarios

Base Case: Realistic assumptions

Optimistic: Things go better than expected

• Higher conversion rates
• Faster sales cycle
• Lower churn

Conservative: Things go worse

• Slower growth
• Higher churn
• Longer sales cycles

Show all three. Investors appreciate honesty about uncertainty.

Step 5: Sensitivity Analysis

What assumptions matter most?

Test: What happens if churn is 5% instead of 3%?

| Scenario | Month 12 MRR | Difference | |----------|--------------|------------| | 3% churn | $200K | Baseline | | 5% churn | $150K | -25% | | 7% churn | $110K | -45% |

Identify your model's key drivers.

Common Mistakes

1. Hockey Stick Without Explanation

Revenue doesn't magically 10x. Explain what drives growth:

• New marketing channel?
• Sales team scaling?
• Product launch?

2. No Headcount Plan

Expenses grow with people. Show:

• Who you'll hire
• When you'll hire them
• How much they cost

3. Ignoring Churn

SaaS companies lose customers. Include realistic churn:

• SMB: 3-5% monthly
• Mid-market: 1-2% monthly
• Enterprise: 0.5-1% monthly

4. Unrealistic CAC

If you've never sold before, don't assume $100 CAC. Research comparable companies.

5. No Seasonality

Many businesses have seasonal patterns. B2B often slows in December.

6. Confusing Bookings vs Revenue

• Bookings: Contract signed
• Revenue: Money recognized (usually monthly for SaaS)

A $12K annual contract is $1K/month revenue, not $12K month one.

7. Forgetting Cash Timing

You might close a deal in March but not get paid until May. Model the actual cash flow.

What Investors Look For

1. Understanding of Business Model

Do you know how your business actually works? The model should demonstrate this.

2. Reasonable Assumptions

Red flags:

• "We'll grow 50% month-over-month for 3 years"
• "Churn will be 0.5% for SMB"
• "CAC will decrease as we scale" (without explanation)

3. Awareness of Risks

What could go wrong? Smart founders acknowledge uncertainty.

4. Capital Efficiency

How much do you need to raise? Why? When do you need to raise again?

5. Path to Profitability

Even if you're losing money now, show when/how you become profitable.

Presentation Tips

Keep It Clean

• One tab per section (Revenue, Costs, Headcount, Summary)
• Use consistent formatting
• Highlight key metrics
• Include a summary dashboard

Know Your Numbers

Be able to answer:

• "What's your CAC assumption?"
• "What happens if churn doubles?"
• "When do you break even?"

Be Honest About Uncertainty

"We think CAC will be $200-300 based on early data, but we're still validating" is better than false precision.

Model Your Business

Use our tools alongside your financial model:

• Unit Economics Calculator - Validate LTV:CAC assumptions
• Runway Calculator - Cross-check runway calculations
• Burn Rate Guide - Benchmark burn rates

Key Takeaways

1. Bottom-up > top-down - build from realistic assumptions
2. Show your work - investors want to see your thinking
3. Include scenarios - base, optimistic, conservative
4. Model cash, not just revenue - timing matters
5. Know your assumptions cold - you'll be quizzed
6. Update regularly - models evolve with data

Related Reading:

• Burn Rate Guide
• Seed Round Checklist
• SaaS Benchmarks 2025