Financial Modeling Services for Startups

A financial model should serve as a strategic roadmap for your startup, offering clarity on its financial viability, fundraising needs and operational decisions. Good financial models help translate your startup’s business plan into quantifiable projections, enabling you to better anticipate challenges and opportunities, while also attracting investors to help your startup scale and grow.

While financial modeling can be performed in-house during the early stages of your startup, it’s often best practice to work with a professional financial modeling service to transform your models from simple to robust over time. There’s a significant difference between basic Excel models and more sophisticated, investor-grade financial projections, underscoring the importance of working with the right professionals to turn your startup’s financial vision into a compelling, data-driven model that attracts key stakeholders.

Why Venture-Backed Startups Need Professional Financial Modeling Services

To continue growing and scaling, venture-backed startups must create credible, investor-ready forecasts that help tell their financial story. A good model can show the path of a startup from its current state to meeting its future goals and validating its assumptions. Good financial models also build credibility with investors and demonstrate that your startup’s leadership possesses deep financial knowledge and a comprehensive understanding of its challenges and opportunities, resulting in better financial performance and clearer key performance indicators for business growth.

Moreover, financial forecasting can be challenging, especially for pre-revenue or rapidly scaling startups that lack robust and significant historical data. This further underscores the importance of working with a professional financial modeling services firm that understands investor expectations and the specific due diligence requirements for various fundraising rounds. Working with a professional firm also frees up your startup leadership’s time to work on the business, such as tasks like product development and customer acquisition, while outsourcing financial modeling to experienced professionals.

The Cost of DIY Financial Models During Fundraising

If you’re not presenting robust, high-level financial models to investors during fundraising rounds, it will likely cost you. DIY financial models come with a high risk of errors or missed opportunities, which can erode investor confidence and make it difficult to raise the necessary capital to grow your startup, hurting financial health. Many startup founders are enticed by the prospect of saving on the cost of hiring a professional, but what they often overlook is that failure to do so can ultimately prove to be much more costly in the long run, especially when key financial metrics are incomplete or cash flow projections are inaccurate.

Some common red flags that can derail investor confidence and are common with DIY financial models include:

• Overaggressive growth
• Ignoring cash flow timing
• Unclear CAC/LTV data
• A poor model structure
• Poor unit economics

DIY models often result in poor unit economics, inflated valuations and can portray a significant operational risk. Ultimately, this can lead to unsuccessful fundraising rounds and tense valuation negotiations, potentially resulting in missed opportunities or unfavorable terms.

When Financial Complexity Demands Specialized Expertise

While basic spreadsheet financial modeling is acceptable for a certain period in a startup’s early days, it will eventually become outdated. So, when should your startup move to more professional financial modeling? Typically, this occurs when they achieve a significant revenue amount, prepare for Series A funding, add more than one revenue stream or make the transition to GAAP standards.

Each industry will have different financial modeling needs and requirements. For instance, SaaS startups should focus on MRR and ARR, while also demonstrating churn rate and cohort analysis. eComm startups should communicate their inventory management, COGS and multi-channel revenue in their financial modeling. HealthTech startups should focus on value-based care metrics while also demonstrating regulatory compliance.

Core Components of Professional Financial Modeling Services

A good financial modeling service takes a comprehensive, in-depth look at your startup’s operations to develop custom financial models that appeal to investors and inform strategic internal decision-making. Moreover, financial modeling isn’t a one-time thing, it’s an ongoing process. Professional modeling services continually refine the financial model, updating it in tandem with key data and projection points as your startup grows and evolves, maintaining accurate financial reporting and up-to-date key metrics.

There are basic financial statements and sophisticated, three-statement models that dynamically link financial forecasting to scenario analysis and your startup’s valuation. When you work with a professional, you can expect them to link core financial statements via formulas, which permit a forward-looking analysis and better informed decision making across all financial aspects of the business.

Custom Revenue Forecasting Based on Business Model Drivers

Revenue modeling will vary based on your startup’s industry of operation. For instance, SaaS startups have different typical requirements than eComm startups, and eComm startups have different requirements than HealthTech startups. Here are some of the industry-specific approaches to revenue modeling for different types of startups:

• SaaS: The key metrics for SaaS startups are MRR and ARR. However, cohort analysis is also important, as is expansion revenue and churn modeling.
• eComm: eComm forecasting should portray CAC payback, LTV modeling, repeat purchase rates and seasonal adjustments.
• HealthTech: HealthTech startups should incorporate reimbursement models and regulatory timelines into their financial models.

Scenario Planning and Sensitivity Analysis

Scenario planning and sensitivity analysis are two key elements of a good financial model. Sensitivity analysis assesses how a key input impacts the model’s output, while scenario planning assesses multiple factors to assess the financial model.

For example, a sensitivity analysis might isolate a variable, such as interest rates or changing raw material costs, to see how the financial model is affected. With scenario planning, it’s common to create models based on best-case, worst-case and most likely case situations. Both are key for showing investors how your startup is prepared to meet various challenges, helping provide a complete picture of how you’re poised to handle risks and threats.

Operating Expense Modeling and Cash Runway Planning

Investors also want to see how your startup is managing its expenses and cash runway. Some of the common expense categories they want to see as part of your financial model include COGs, R&D costs, sales and marketing and G&A.

They also want to be sure that you have a hiring plan in place to support the growth of your startup. For instance, too much overhead too soon can sap profits and reduce the cash runway. However, if you’re hiring as you reach revenue milestones, it demonstrates more disciplined management of headcount.

Your startup’s burn rate and cash runway have an inverse relationship. The less money you burn, the more runway you’ll have before you need to plan another fundraising round — and vice versa. A good financial modeler not only incorporates this data into your model but also ensures that your burn rate is within the expected range for your startup’s stage.

The Financial Modeling Service Delivery Process

The professional financial modeling service delivery process begins with an initial consultation and concludes with the delivery of an accurate and robust model. In between, there’s a process that all good professionals follow.

Discovery and Model Construction

Following the initial consultation, a professional will enter a discovery and information-gathering stage with startup leadership to create the financial model. In this stage, the modeler will gain access to key documents such as business plans, historical financial data, customer data and pricing. They’ll then perform their own market research and competitive benchmarking to ensure assumptions are accurate and assess where any changes can be made. Professional models tend to have a combination of driver-based inputs, automated calculations and scenario toggles that can be easily adjusted to model a variety of different scenarios.

Model Review, Training and Ongoing Updates

Once the data is gathered and the model is constructed, it undergoes a process of fine-tuning. That is, modelers will meet with startup leadership to ensure it checks all the boxes, and also teach them how to update and properly utilize the model. Financial modeling documentation, or the process of recording all components of a financial model, and an assumption log, or record of all estimates and subjective judgments used as inputs, is also recorded to support the model’s defensibility.

Financial models also require ongoing maintenance, especially as startups approach fundraising timelines or prepare for board meetings.

Integrating Financial Modeling With Comprehensive CFO Services

Financial modeling is just part of the duties a good fractional CFO can help a growing startup with. However, it’s also one of the most important tasks, as financial modeling helps inform budgeting, FP&A and fundraising, among other tasks. A fractional CFO can help with all of this and evolve their services as your startup grows, while helping resource-strapped startups save significantly on what it would cost to hire a full-time, in-house CFO. Particularly for pre revenue startups seeking business growth and durable sustainable growth, under variable market conditions with guidance from experienced financial modeling consultants.

From Financial Models to Board Reporting and Investor Updates

Financial models help support board presentations and the creation of decks. Information and metrics from these models are disseminated to investor reporting documents and materials. Models can also help prepare startup leadership for board meetings and important conversations. Essentially, good financial modeling can help tell your startup’s story and set the table for many of the other things your startup needs to ensure its growth and success.

Transform Your Startup’s Financial Strategy With Expert Modeling

Are you ready to take your startup’s financial modeling services to the next level? Graphite Financial is here to help. As a full-service financial firm that pairs experienced fractional CFOs with startups, we’ll help turn your modeling into a strategic advantage and help your startup appeal further to investors. Contact us today to learn more and schedule a consultation.

Frequently Asked Questions About Financial Modeling Services

How much do financial modeling services typically cost for startups?

Financial modeling service costs vary based on the provider that you work with and the level of service that your startup requires. Providers that offer basic templates and limited service may charge only a few hundred dollars per month, while more robust financial modeling may cost several thousand dollars per month. At Graphite, our fractional CFO packages, which include financial modeling as a service, start at just $1,250 per month.

How long does it take to build a comprehensive financial model for a startup?

The length of time it takes to build a comprehensive financial model depends on a variety of factors, such as model complexity, availability of data and the skill level of the modeler. Based on these factors, a comprehensive financial model may take anywhere from a few days to several weeks or even months to create.

What information do I need to provide to a financial modeling service?

There are several documents and data pieces that you need to provide to a financial modeling service. This includes your historical financial statements, your startup’s operational data and various other inputs. You’ll also need to work with the modeling service to review your startup’s assumptions and projections, creating an accurate forecast. The right provider will help detail the information and data needed to create an accurate financial model.

Can financial modeling services help if I already have a model that needs improvement?

Absolutely. A good financial modeling service isn’t just able to help you create a robust modeling framework, but also help you improve upon any existing model. Some of the common improvement areas that modeling services can assist with include simplifying complex models, more unified planning to create more consistent forecasts, automating processes to reduce human error and better documenting data sources and logic.

How often should startups update their financial models?

It’s best practice for startups to update their financial models at least quarterly, though early-stage startups should consider updating them as often as monthly. Early-stage startups often have rapidly changing data, necessitating monthly updates. However, more established startups usually only require quarterly updates to compare forecasts, spot trends and make adjustments. It’s also best practice for startups to update their financial models after any major events, such as closing fundraising rounds, changing business models, launching new products, or when facing unexpected market or economic challenges.

What’s the difference between a financial model and a business plan?

Business plans are big-picture roadmaps that detail how your startup creates, delivers and captures value. A financial model typically resides within the business plan and is used to forecast the amount of money the strategy is expected to generate, thereby proving its viability. Think of the business plan as the idea and the financial model as the reality of that idea to prove out the business plan.