To understand the need and importance of startup financial models, we first need to know what exactly it is that the financial sector involves itself in. Financial institutions, such as investment companies, banks and security firms handle the flow of cash, the amount of which can often be of such a nature as to make it unpredictable. In some cases this amount is dependent on certain future conditions, as in equity or bonds. This makes the very nature of financial transactions uncertain and unstable.
Choosing the right model
A particular context or decision should go in the actual realization of practical startup financial models. This decision or context depends on the horizon within which it has to be located. Many businesses and other financial activities require a limited horizon, while others operate within horizons that may stretch for weeks, months and maybe even years. Models that have been designed to work with continually and frequently changing data and processes would not be applicable in instances which are gradual and remain static for longer periods of time. Hence the need to choose the right type of financial model is a crucial one.
Which models are good?
While the large number of uncontrollable factors make it difficult for most startup financial models to work as focused tools for predictions. However, these models can be used for various other purposes such as risk and profit assessment, projecting the values of assumptions that are made based on existing market conditions, calculating the margins that are needed to avoid adverse situations, and various forms of sensitivity analysis. These are necessary to regulate minimum capital investment, capital allocation and measuring performance.
The best place to start a financial model from, is a profound understanding of the case that requires this model. The approach is partially fulfilled by those startup financial models that contain parts of market behavior, but reality can often be vastly different from the theory that is to be followed. To understand fully the nature of all the forms of risk that the business might be exposed to, the financial model should clearly reveal the possible areas of dependencies. These dependencies can be seen between different kinds of activities and between consecutive time periods. It is also helpful if the model explains the relationship between asset types and types of business. In such a case, the way that the two sides of a balance sheet interact would be shown up clearly.
Some startup financial models
There are a number of startup financial models available for various businesses and the particular situations that they encounter. Some of the more general financial models are, comparative financial analysis, cash flow forecasting and business plan models. These models look to setting up the best methods of controlling the cash that comes in and goes out. However, these are only very few of the models that are available and there are a number of business specific startup financial models in the market to choose from.