Financial modeling for startups is the process of projecting and forecasting revenue, customers, employees, costs, etc., for the future to understand and assess the profitability and viability of the business. Given that the startup is still in shape, this modeling will help prepare the budget and business plan for them and will help present that to potential investors.
- Revenue: The first thing is to determine and forecast the revenue for the product you are launching. It can be a bit tricky because you are a new entrant into the market. For determining the sales, you can use the Total Available Market (TAM), Serviceable Available Market (SAM), and Serviceable Available Market (SOM) model. First, the total available market is to be determined and from that company’s estimated revenue needs to be found.
- Costs: This can be easier since the firm controls its resource and overhead costs. Costs will include direct costs, overhead costs etc.
- Income – To achieve and calculate Operating Income and Net Income, we use the above two parameters. You can calculate Operating income by subtracting operating costs from revenue.
- Growth Rate – The future growth rate for revenue and costs also needs to be determined, which can be quite tricky, given the uncertainties over the future. For projecting future revenue, the industry outlook, the company’s available cash, and future investment need to be seen. Cost projection can be a function of revenue.