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Financial Models for Startup Entrepreneurs

Virginia GinsburgPresident & Chief Consultant

Swell Strategieswww.swellstrategies.com

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As an entrepreneur, you are fully expected to fall in love with your idea.

The key, however, is to ensure that you don’t become blinded by that love and end up making stupid choices in business.

Your financial model is a great protection against blind love.

Your Idea = True Love

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A financial model, or a financial plan, is basically an excel document into which you can plug various factors that will impact your financial future as an entrepreneur.

What is a Financial Model?

This is not the right type of model to build for your business.

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A software entrepreneur needs to sketch out pricing packages and then model what will happen if 10, 100, and 1,000 people start using his software.

For example, if he gets 100 people to pay for his software, at $100 each, he will make $100,000.

But in addition to this “happy number,” he also needs his model to tie in how much it will cost him to acquire each customer and fulfill each order.

Financial Model: Example

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You need to estimate both prospective customers and sold customers.

Financial Model: Customer Acquisition

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Based on your customer acquisition model, you can estimate revenue.

Financial Model: Revenue Streams

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Your fixed costs are the expenses that your business has to carry just to “keep the lights on.”

Financial Model: Fixed Costs

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Your variable costs are the expenses that vary based on the number of customers you serve.

Financial Model: Variable Costs

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Your profit and loss (P&L) worksheet is also called an Income Statement.

This will bring all of your information together so that you can see how your income and expenses compare and, ultimately, when you can expect to see a profit from your business.

Financial Model: Profit and Loss

Check out this template available from Entrepreneur Magazine.

http://www.entrepreneur.com/formnet/form/

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Once you have set your financial model up as a linked workbook in Excel, then you will have the opportunity to play with your numbers.

For example, you can create “worst case,” “average,” and “best case” scenarios to help you determine the risk level walking into an opportunity.

Financial Plan: Having Fun

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Your financial model should be a living, breathing document that you reference regularly to make sure you are on the right track.

Financial Plan: Don’t Forget!

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Good Luck!Virginia Ginsburg

President & Chief Consultant Swell Strategies

www.swellstrategies.com