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How Financial Models Save Time and Money: An Analogy

Tuesday, June 28th 2022 (about 1 month ago)

In the epic drama of running an early-stage startup, a financial model is like a trusty sidekick.

A solid model is a structured reference point that gives you the critical information you need to make better operational decisions every day without constantly mining through mountains of redundant data.

Rather than re-working your numbers and strategies for each situation and scenario, you can rely on a financial model to be a dependable assistant for quick and effective decision-making in every situation.

With a great financial model on your side, you never have to accept the risks of guesswork when analyzing revenue, growth, expenses, or even your exit strategy. You’ve got a trusty sidekick who crunches those numbers for you in real-time.

But we know an even better analogy that was shared with us by Troy Henikoff from MATH Venture Partners. It demonstrates the role a financial model can play in your daily drama as a founder, and we’d like to share it with you, too.

Illustration: A fast car

Table of Contents

What Is a Financial Model?

A financial model compiles all of the information from your three primary financial statements and uses that collected data to calculate a forecast of your financial future.

With a financial model, you can confidently project your cash flow, income, expenses, and more. It allows you to estimate the feasibility of a business decision, and weigh your options according to their likely financial impact.

Troy Henikoff used the process of car prototyping to illustrate the importance of financial modeling, and we think it’s a great analogy.

Car Prototyping: The Antiquated Way

Automobiles have been around since the 1880s, and the process of prototyping new designs was once a highly costly and troublesome venture. In the early days, engineers had to slog out full-scale replicas of each model. It was a tedious and hazardous process.

Manufacturers built entire vehicles for the sole purpose of having some brave soul jump in to see if the design concepts held up under real-world conditions. Back then, there was a scarcity of information regarding car safety and performance, so it made sense for companies to invest time and resources in extensive test-driving and troubleshooting.

Naturally, most of the proposed concepts never made the cut. Bold designers incurred high costs and casualties during the experimentation process. To be a pioneer in the field, you would have to spend millions of dollars creating many iterations of a single prototype.

In today’s context, this tedious process would be utterly illogical from a business standpoint. While it made sense then, it’s now obviously obsolete.

Illustration: Digital car prototype

Car Prototyping: The Modern Approach

Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” The famed physicist eloquently meant that he had achieved great strides in his career by leveraging the work of others who came before him.

The modern approach to car prototyping is a similar concept. Today, manufacturers can spare most of the trouble, cost, and danger of prototyping a car by using data-driven models.

Powerful software and complex algorithms help manufacturers calculate the feasibility of new designs.

Modern manufacturers can achieve the same results as their predecessors in a fraction of the time (minutes versus months), and without requiring any brave soul to put their life on the line.

Decades of collected data allow engineers to run a virtual car on a digitized track. They can execute a sharp turn at high speed without compromising the safety of a test driver or the integrity of their prototype. They use digital assets to predict real-world outcomes.

That’s exactly what a financial model can do for your business. It uses your historical data to project your financial outcomes.

How a Financial Model Powers Your Modern Business

Financial modeling software lets you create an accurate forecast of your future without enduring several failed iterations to find a successful strategy.

A financial model can show you how business decisions, new expenses, and new revenue streams ripple through your startup’s finances and help you find the best course of action.

From signing up for a new service to launching a new product or hiring a new manager, you get to see the effects of a decision on your finances, without climbing into the crash car and taking that high-speed turn.

How To Get Started

In an increasingly volatile world, a reliable financial model may be one of the most significant investments you can make as a founder.

At Forecastr, we dedicate ourselves to helping early-stage startups build powerful, accurate, and reliable financial models. We give you access to a team of dedicated financial analysts who work alongside you to build a model that’s easy to use and maintain.

And we provide a simple and convenient interface that makes your financial model accessible to investors and other stakeholders. Reach out today to learn more.

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