Don't Make This Huge Mistake on Your Financial Model

Don't Make This Huge Mistake on Your Financial Model
Image credit: Shutterstock
Reader Resource

Position yourself for growth in 2017—join us live at the Entrepreneur 360 Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »

Over the past few years, I’ve worked with dozens of startups through TechStars, General Assembly and the Edge EdTech Accelerator to help founders improve their financial models to secure potential funding. Whenever I ask the entrepreneurs to share their financial models with me, I almost always see one common characteristic: The models are almost entirely focused on expenses.

Related: How to Keep Leaders Focused on a Company's Most Important Metrics

Now, don’t get me wrong. The ability to convey your forecast headcount, marketing budget and fixed costs is critical to demonstrate credibility and your expected use of investor funds. But VCs don’t really spend much time focusing on your predicted rent expense in month seven of year three; especially because your expected costs are likely to change anyway. That's just a matter of accounting. What investors really want to see is a detailed analysis of the levers that drive your revenue.

Building such a revenue model is much more than just having two rows on a spreadsheet to forecast customers and revenue.

Related: To See Results, Entrepreneurs Must Choose the Right Marketing Metrics 

The best entrepreneurs spend many weeks or even months modeling and validating the dozens of drivers that feed into those important top-line numbers. They know how to convey how sub-metrics like site visits, conversion rates, retention rates, virality, repeat purchases, unit marketing economics and different customer cohorts interact to tell a story about growth.

The best financial models clearly bridge the story of past revenue with the story of future revenue.

Too many first-time entrepreneurs maintain separate spreadsheets for the past and for the future (or for accounting and growth). This makes it hard to maintain a consistent row and column structure in two different places and really difficult for investors, acquirers and other stakeholders to see how your progress-to-date can translate into future progress.

Related: Use the Metrics That Really Matter in Your Business

Your goal should be to have a single hierarchical model that shows, from left to right, the clear transition from past to forecast (perhaps with a vertical dividing line for "today"), which allows you to input different spending assumptions that lead to predictable differences in your expected growth in those future months.

Having a streamlined revenue model is one of the fastest ways to close new investors (in addition to many other benefits of being metrics-driven). For more information on how you can build strong business models, check out my complete guide to building a metrics-driven business.

Have fun in spreadsheet land!