Financial Modeling 101
Your financial model tells the story of your business in numbers. Its how you plan, how you raise money, and how you make decisions. This guide shows you how to build models that investors trust and that actually help you run your company.
What's Inside This Guide
Why Financial Models Matter
A financial model isnt just for fundraising—its a decision-making tool that helps you understand the levers of your business and plan for different futures.
What a Good Model Does
The Right Level of Precision
Early-stage models are wrong—thats okay. The point isnt accuracy; its understanding assumptions and relationships. A model that helps you think clearly is more valuable than one with false precision. Focus on the big drivers, not decimal places. Update monthly as you learn.
Types of Financial Models
Different models serve different purposes. Start simple and add complexity only when you need it.
| Model Type | Purpose | When to Use | Complexity |
|---|---|---|---|
| Operating Model | Day-to-day planning and tracking | Always—your core model | Medium |
| Unit Economics Model | Understand customer profitability | Pre-seed onward | Low-Medium |
| Fundraising Model | Support investor conversations | When raising | Medium |
| 3-Statement Model | Full P&L, Balance Sheet, Cash Flow | Series A+ | High |
| Scenario Model | Plan for different futures | Always alongside operating | Medium |
Model Evolution by Stage
Revenue Modeling
Revenue is the top of your model and the most scrutinized part. Build bottoms-up from real drivers, not top-down from wishful thinking.
Top-Down (Avoid Early)
How it works: TAM × Market Share = Revenue
Example: "$50B market × 1% share = $500M"
Bottoms-Up (Use This)
How it works: Leads × Conversion × Price = Revenue
Example: "1000 leads × 5% × $10K ACV = $500K"
Revenue Model Components (SaaS)
Revenue by Business Model
Sanity Check Your Growth
If youre projecting 10x growth next year, you need to explain how. More salespeople? Viral growth? New channels? Every growth assumption should tie to a specific activity and realistic capacity. Investors see through hockey-stick projections without substance.
Cost Structure & Burn Rate
Understanding your cost structure reveals your leverage points and burn rate. Model costs carefully—theyre often easier to predict than revenue.
Cost Categories
Fixed vs Variable Costs
- • Salaries and benefits
- • Office/rent
- • Software subscriptions
- • Insurance
- • Hosting (usage-based)
- • Payment processing
- • Sales commissions
- • Marketing spend
Burn Rate Calculations
The Hiring Plan Drives Costs
70-80% of startup costs are people. Your hiring plan IS your cost model. Map out when youll hire each role, fully-loaded cost (salary + benefits + equipment = ~1.3x salary), and ramp time. Tie hires to milestones, not just dates.
Unit Economics Deep Dive
Unit economics tell you whether your business model works at scale. If you lose money on each customer, you cant make it up in volume.
Key Unit Economics Metrics
LTV Calculation Example
Healthy Unit Economics
Warning Signs
Segment Your Unit Economics
Blended metrics hide problems. Calculate unit economics by channel (organic vs paid), by segment (SMB vs enterprise), and by cohort (when they signed up). You might find one channel is profitable and another is burning cash.
Cash Flow & Runway
Cash is oxygen. You can be profitable on paper and still run out of cash. Model cash flow carefully and always know your runway.
Cash Flow Statement Structure
Cash vs Revenue: The Timing Gap
Runway Management Rules
The 13-Week Cash Flow Forecast
For operational planning, build a 13-week (one quarter) weekly cash flow forecast. Track expected receipts, payables, payroll, and other cash movements week by week. Update weekly. This catches cash crunches before they happen and becomes critical as runway gets tight.
Scenario Planning
The future is uncertain. Model multiple scenarios to understand your range of outcomes and prepare contingency plans.
The Three-Scenario Framework
- • 50-70% of base revenue
- • Higher churn assumed
- • Slower growth
- • Delayed hires
- • Current trajectory
- • Realistic assumptions
- • Planned hires
- • Expected milestones
- • 130-150% of base
- • Lower churn
- • Faster conversion
- • Accelerated hiring
Variables to Stress Test
Contingency Triggers
Run Scenarios Monthly
Update your scenarios monthly with actuals. How did last month compare to each scenario? Are you trending toward bear, base, or bull? Adjust your operating plan accordingly. Scenarios arent just for planning—theyre for continuous decision-making.
Fundraising Projections
Your fundraising model shows investors how youll use their money and what milestones youll hit. It needs to be ambitious but credible.
Use of Funds Framework
Milestone-Based Planning
Map raise to milestones that enable the next raise:
| Stage | Raise | Milestone to Next |
|---|---|---|
| Pre-Seed | $500K-$2M | MVP, first 10-20 customers, early PMF signals |
| Seed | $2M-$5M | $500K-$1M ARR, repeatable sales motion |
| Series A | $10M-$20M | $2M-$5M ARR, proven unit economics, scalable GTM |
| Series B | $25M-$50M | $10M+ ARR, market leadership, path to profitability |
What Investors Want to See
Red Flags in Models
The 18-Month Rule
Raise enough for 18-24 months of runway. This gives you time to hit milestones (12 months) plus time to raise again (6 months). Raising for less puts you in constant fundraising mode. Raising for more dilutes unnecessarily and may mean overpaying for capital.
Key Metrics by Stage
Different metrics matter at different stages. Focus on whats relevant now, not what youll need later.
Pre-Seed / Seed Stage
- • Monthly active users (MAU)
- • Engagement (DAU/MAU, time in app)
- • User growth rate
- • Early revenue/MRR
- • Burn rate and runway
- • Product usage and love
- • Signs of PMF
- • Learning velocity
- • Capital efficiency
Series A Stage
- • ARR and ARR growth rate
- • Unit economics (LTV:CAC, payback)
- • Net revenue retention
- • Sales efficiency
- • Gross margin
- • Repeatable sales motion
- • Healthy unit economics
- • Customer retention
- • Scalability signals
Series B+ Stage
- • ARR and path to $100M
- • Magic number / sales efficiency
- • Gross and net margin
- • Rule of 40 (growth + margin)
- • Market share
- • Category leadership
- • Path to profitability
- • Operating leverage
- • Defensibility/moat
The Rule of 40
For growth-stage companies: Revenue Growth Rate + Profit Margin should exceed 40%. Growing 50% with -10% margin? Good (40). Growing 20% with 30% margin? Good (50). Growing 30% with -20% margin? Not good (10). This balances growth and efficiency.
Model Structure & Best Practices
A well-structured model is easier to update, audit, and share. Follow these conventions to build models that last.
Recommended Sheet Structure
Modeling Best Practices
Common Modeling Errors
Tools for Financial Modeling
Start with Google Sheets or Excel—they work fine through Series A. Graduate to dedicated tools like Causal, Runway, or Mosaic when you need collaboration, scenario management, and actuals integration. The tool matters less than the rigor of your thinking.
Presenting to Investors
Your model tells a story. Present it in a way that builds confidence in your business acumen and your ability to hit targets.
What to Show in Pitch Deck
Questions Investors Will Ask
Own Your Numbers
Investors can tell when founders dont understand their own model. Know every number, every assumption, every sensitivity. If someone else built your model, understand it deeply before presenting. Nothing kills credibility faster than fumbling through your own financials.
Common Modeling Mistakes
These mistakes undermine credibility and lead to bad decisions. Avoid them to build models that actually help you.
01Top-down revenue projections
Saying "1% of a $10B market" tells investors nothing about how youll actually get customers.
02No churn in the model
Every SaaS company has churn. Ignoring it makes your projections fiction.
03Expenses that dont scale with revenue
If revenue 10x but costs stay flat, your model is broken.
04Over-optimistic conversion rates
Claiming 20% conversion when industry average is 5% needs serious justification.
05Forgetting fully-loaded employee costs
Salary is only 70-80% of true cost. Benefits, taxes, equipment add up.
06No scenarios or sensitivities
Single-point forecasts pretend you know the future. You dont.
07Perfect hockey stick
Smooth exponential growth looks fake. Real businesses have lumps.
08Never updating the model
A model from 6 months ago is useless. Business changes fast.
Your Model Audit Checklist
Use this checklist to validate your financial model before sharing with investors.