top of page

Top 5 mistakes in financial modeling









As we approach the end of 2021, many organizations are diving into the budgeting process for the upcoming fiscal year. Amidst a second wave of the pandemic, uncertain times, and a financial crisis, planning cashflow has never been more crucial to a business's success.


What is a cash budget some might even ask? Well, it's management's approximation of what the inflows and outflows of cash might look like. It can be used for cost control measures, or to support aggressive growth. Sounds easy enough? Think again! Business models differ, and you need someone who understands the business to be able to accurately build a budget and forecast future cash flows.


As a geek expert in tech startups, here are some of the questions a SaaS (software as a service) company’s financial model should be able to answer at a high level:

  1. How much do you charge for the recurring service?

  2. What are your customer acquisition costs and the buyback period?

  3. What are your direct costs?

  4. How much time do you need to finish the development of the software/platform?

  5. How much will the salaries cost until you go from pre-revenue to revenue, to generating profit?

Once you figure out the inflows and outflows, you can play around with the model and use different scenarios to predict future outcomes to a certain degree. If you don't like what you see, make changes! Modeling is an excellent tool to make strategic decisions.


Here are five common mistakes I have seen being made in the financial modeling process:

  1. Ambitious sales predictions

  2. Impulse spending after raising capital

  3. Passively collecting old receivables/not timing payables

  4. Founders putting on a CFO hat (very common when bootstrapped)

  5. Tracking the wrong metrics

If you're concerned about your cash runway, monthly burn rate, or just need someone to put your growth plan into a story that can be understood in numbers, look no further.


About

Nex CPA is a boutique Canadian digital accounting firm that provides online accounting solutions by combining technology and forward-thinking businesses. Tailored for the modern entrepreneur, we provide an easy, automated and client-focused service so you can focus on working 'on' the business and not 'in' the business.


For more information, please contact us at info@nex.cpa.

20 views

Comments


bottom of page