The learning curve is always steep when you’re starting a new business from scratch. You don’t always know which marketing channels will be effective, which product features should be built first, or the order in which you should hire your key positions.
One startup can operate like a well-oiled machine, while another operates like a train running off the tracks. Sometimes it’s hard to pinpoint exactly what causes these wildly different outcomes.
But there are concrete steps you can take as a founder to ensure that your business ends up in the well-oiled machine column rather than the trainwreck column.
Perhaps the biggest thing you can do to take control of your destiny is to create a solid startup financial model, keep it in good working order, and periodically compare your forecast against your actuals.
It’s a simple process that only takes a few hours each month. But all too often, this simple process gets buried in the hectic day-to-day shuffle of startup life.
This post lays out a clear, actionable approach you can use to keep your financial model up to date and keep your startup running on the tracks toward a successful exit.
A startup financial model consolidates all of the information from your three primary financial statements and creates projections for your future financials.
While a model is based on your basic financial statements, the information you can glean from it goes much deeper. It gives you a clear understanding of your burn rate and runway. It lets you dig into your customer acquisition strategy. It projects customer churn and retention. It lets you identify which areas of your business are underperforming and outperforming.
A financial model gives you great insight into your key performance metrics and lets you experiment to see which factors you need to improve to bring your performance in line with your targets.
When you practice good financial hygiene and keep your model up to date, it becomes an invaluable guide in your daily decision-making.
As a founder, a well-maintained startup financial model is one of the most useful tools you can have.
While a financial model can provide unparalleled insight into your operation, it does require some regular maintenance to realize its potential.
Following these five essential steps regularly, every month will create a model that becomes more accurate and more useful with each passing month.
A model lets you see how your performance varies month over month. This is useful on its own, but it takes on a new dimension when you have concrete growth targets to measure against.
As you’ll see below, when you can measure your monthly performance against your targets, you always know whether or not you’re on track to hit your goals for the month, the quarter, and the year.
You don’t need to have a target for every single metric you track, but you should set targets for key metrics and KPIs that are closely related to your short-term and long-term goals.
The best metrics for you to track depend on your business model and your unique goals. Choose the metrics that most directly impact your success or failure in attaining those goals, and decide which system will be your single source of truth for each metric.
After you document your targets, the next step is simple. Step away from your financial model and go run your business.
Sell new customers, sign new partners, build new products, launch some rockets – whatever it is you do, do it well. You won’t need to worry about your financial model again until the end of the month.
At the end of the month, it’s time to gather up all your metrics and plug them into your financial model.
Pull every metric from its single source of truth, and never manipulate the data. If you fudge your numbers, you won’t be able to identify the areas that need the most improvement. Raw, accurate data will produce the best results.
Calculate your KPIs and add them to a document, spreadsheet, or dashboard where you’ll track your performance month over month.
Compare your actual performance against your targets. Which targets did you hit, and which ones fell short? Why?
This is the most important step. Your analysis here will help you identify which areas of your business need the most attention and which should be left alone.
If one area of your business is outperforming others, you might be able to borrow its successful systems and apply them across other areas of your business. If any aspect of your business is continually struggling, you can make the necessary adjustments to bring it back in line with your plan.
If you’re significantly missing your target on any KPIs, this is your cue to take corrective action and, if necessary, communicate the issue to your investors and stakeholders.
You should also allow this analysis to inform your goal setting for the next review period.
With a clear understanding of what’s working and what’s not, you’re ready to set new targets for the next month.
Adjust your targets to reflect the reality of last month’s actual performance. Adjust your strategies to correct any problems you identified during your monthly analysis.
Repeat the process starting at step #2, go back out there and run your business.
When you complete this analysis regularly, your financial model becomes more and more accurate with each passing month. Your projections begin to fall in line with your performance, and you know exactly how you’re tracking against your KPIs and your long-term goals.
Because you’re adjusting your strategies each month, you see fewer and fewer performance issues. As your performance improves, your monthly targets climb higher.
If you can attain this state of continuous improvement, you’ll be well on your way to a startup that operates like a well-oiled machine.
When you’re ready to implement monthly performance tracking for your startup, we’ll be here to help. Our online service lets you create an awesome financial model, and our experienced financial analysts help you make the most of it. Reach out today to learn more.
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