Start With the Purpose of the Financial Model

Before building spreadsheets, management should define what decisions the model is expected to support.

A model prepared for internal budgeting may look different from one prepared for fundraising, valuation, acquisition financing or strategic expansion.

For a capital raise, the model should help investors understand where the business stands today, where management expects it to go and what funding is required to get there.

Build From Historical Financial Performance

Forecasts become more credible when they are connected to the company's actual historical performance.

Investors may compare historical revenue, margins, operating expenses and cash flow with future projections to understand whether assumptions represent a reasonable continuation or a significant change in the business.

Historical analysis may include:

• Revenue growth
• Gross margins
• Operating expenses
• EBITDA or operating profitability
• Working capital
• Capital expenditure
• Cash generation or burn

Model Revenue Using Operational Drivers

Revenue should ideally be built from the operational factors that actually create sales.

Simply applying a percentage growth rate to the previous year's revenue may be insufficient when the underlying business has identifiable commercial drivers.

Depending on the business, revenue drivers could include:

• Number of customers
• Average revenue per customer
• Units sold
• Production capacity
• Locations or outlets
• Subscriptions
• Contract values
• Customer retention
• Sales conversion rates

Reflect the Real Cost of Growth

Rapid revenue growth does not automatically create attractive economics.

An investor-ready model should show what additional resources are required as the company scales.

Relevant cost assumptions may include:

• Cost of goods or services
• Employee costs
• Sales and marketing expenditure
• Technology and infrastructure
• Rent and facilities
• Professional expenses
• Distribution and logistics
• Corporate overhead

Investors will often evaluate whether operating leverage improves as the company grows or whether expenses increase at approximately the same rate as revenue.

Include Working Capital Requirements

Working capital is one of the most commonly underestimated components of growth planning.

A company can become profitable on paper while still requiring substantial cash if customers pay slowly, inventory increases or suppliers require faster payment.

The model should consider:

• Receivable days
• Payable days
• Inventory days
• Customer advances
• Supplier terms
• Seasonality

These assumptions allow management to understand how growth affects cash requirements rather than looking only at accounting profit.

Connect Profitability to Cash Flow

Investors generally want to understand when the business is expected to generate cash and how much external capital will be required before reaching that point.

The model should therefore connect the income statement, balance sheet and cash flow assumptions rather than treating them as unrelated schedules.

Calculate the Capital Requirement From the Model

The fundraising target should ideally emerge from the operating plan rather than being selected independently.

Management should identify the funding required to support growth, maintain adequate liquidity and achieve the milestones expected before the company may require additional capital.

Use of funds may include:

• Working capital
• Geographic expansion
• Capacity expansion
• Technology investment
• Hiring
• Sales and marketing
• Product development
• Strategic acquisitions

For a broader fundraising-readiness perspective, see our Capital & Fundraising Advisory capability.

Build Base, Upside and Downside Scenarios

Investors generally understand that forecasts are uncertain. What matters is whether management has considered how the business performs under different conditions.

Keep Valuation Assumptions Grounded

Financial models often form an important input into valuation, but projected growth should not automatically be treated as value already created.

Investors may assess valuation using a combination of historical performance, comparable companies, transaction benchmarks, profitability, cash flow and future growth expectations.

Highly speculative expansion opportunities should generally be distinguished from the assumptions supporting the core operating case.

Explore our Financial Modelling & Valuation Advisory capability for more information.

Test the Model for Internal Consistency

A financial model can lose credibility quickly if the schedules do not reconcile or the assumptions contradict each other.

Before sharing the model, review whether:

• The balance sheet balances
• Cash flow reconciles correctly
• Revenue assumptions flow consistently through the model
• Working capital assumptions are applied correctly
• Capital expenditure affects depreciation and cash flow
• Debt schedules reconcile with interest expense
• Funding proceeds appear correctly in cash balances

Make the Model Easy for Investors to Review

A good model should be understandable by someone who did not build it.

Assumptions should be clearly identified, calculations should follow a logical structure and outputs should allow investors to understand the major financial drivers without navigating unnecessarily complex spreadsheets.

Businesses preparing financial statements can also refer to the IFRS Foundation for information on international financial reporting standards.

Before Sharing Your Financial Model

What Makes a Financial Model Less Credible?

• Revenue projections without operating assumptions
• Extremely aggressive growth without supporting evidence
• Ignoring working capital requirements
• Forecasting profitability without adequate hiring or infrastructure
• Using inconsistent assumptions across worksheets
• Ignoring downside scenarios
• Using speculative expansion plans to justify the core valuation
• Failing to connect the funding requirement to use of funds