When you’re figuring out how to build a financial model, you might think of number-crunching in Excel spreadsheets. However, for growth-focused CEOs, founders, and CFOs, a financial model can be much more strategic: A tool for clarity, confidence, and action.
That’s because it’s a valuable decision-making tool that helps leaders forecast, plan, and course-correct based on data, instead of guesswork. This is especially true when designing a startup financial model, where clarity can define investor confidence.
What exactly is financial modeling? It’s a structured way to forecast your company’s financial performance and understand your company’s financial health in the context of strategic decisions made by private equity firms and equity investors.
Whether you’re planning your new product launch, debating your next hire, considering a pricing adjustment, or weighing market expansion, the ability to model financial outcomes turns uncertainty into insight.
While a financial model can unlock clarity and drive decision-making, here at Nimbl, we know a model is only as valuable as the insight it delivers.
That’s why we’re revealing the secrets to building a financial model that will support your business’s future.
What Should a Good Financial Model Include?
Wondering how to build a financial model that gives you a true understanding of your financials? Instead of just using a generic financial modeling template, your financial models should reflect your business’s unique drivers.
Keep in mind that most small businesses today are struggling with financial problems, ranging from inflation to taxes. Robust modeling is a cornerstone of small business finance, enabling more resilient decision-making. A strong financial model gives you the best chance of surviving and thriving.
Here’s what it should include.
Revenue Projections
Revenue and expense projections give you a clear, well-structured view of how your business makes money. This is often the first step in revenue forecasting, allowing teams to anticipate trends and plan accordingly.
These financial projections should break down income by product lines, services, or distinct revenue channels—whatever makes the most sense for how your business actually operates.
This granularity gives leaders a deep understanding of what’s driving growth and where risk lies. Modeling revenue growth accurately helps drive future-facing decisions. These projections often become key components in a company’s financial statements, including the income statement and balance sheet.
Cost of Goods Sold (COGS)
The cost of goods sold (COGS) represents the direct costs of producing your product or delivering your service. These expenses, such as raw materials, labor, and packing, scale with your revenue.
For leaders focused on growth, it’s critical to understand how COGS impacts your margins. A well-built financial model separates these costs from other operating expenses, making it easier to evaluate the economics of your products and forecast profitability.
Operating Expenses
Operating expenses cover the day-to-day cost of running your business. This includes payroll for your team, software subscriptions, marketing spend, and office rent.
Leaders need to go beyond tracking operating expenses to develop a financial model that fuels strategic allocation. Your model shouldn’t just list and clarify expenses: It should help you understand how they translate to business outcomes.
Are your marketing dollars translating to pipeline growth? Is your headcount scaling in line with revenue?
Cash Flow Forecasting
Cash flow forecasting shows how money is expected to move in and out of your business. It tracks the timing of cash inflows (like customer payments) and outflows (like payroll), giving you a view of your liquidity and financial runway.
Remember that over 80% of small businesses fail due to cash flow problems.
A strong cash flow statement helps you anticipate shortfalls before they become problems, plan for significant expenses, support budgeting and forecasting efforts, and time investments to match your financial positions. In early-stage startups, accurate cash flow projections are essential for maintaining operations and securing funding.
Profit and Loss (P&L) Statements
P&L statements (or income statements) summarize your company’s revenue and expenses during a set period (such as quarterly). A well-modeled P&L gives leaders a big-picture view of business health.
It goes beyond transactions and helps you understand whether you’re profitable, overspending, and having good margins, whether you’re doing SaaS accounting, eCommerce accounting, or offering professional services. Together with the balance sheet and cash flow statement, this three-statement model gives a full view of financial health.
It is completed by tools like the balance sheet, which gives a fuller financial picture. That and the cash flow statement are two of the core financial statements.
Scenario Planning
Scenario planning models multiple versions of your financial future performance, such as best-case, worst-case, and expected outcomes. This process involves developing key assumptions about future cash flows and customer acquisition costs that impact company valuation.
It’s critical to any robust economic model because it helps leaders prepare for uncertainty and ensures surprises don’t catch them off guard.
What happens if sales start to drop? What if customer acquisition outpaces hiring?
KPIs and Ratios
Key performance indicators (KPIs) and ratios help you quickly understand how your business is performing and where it’s heading.
A strong financial model should track and project the KPIs that matter most to your business, such as CAC/LTV, gross margin, burn rate, and runway. These KPIs are a pulse check that helps you make smarter decisions, communicate with investors, and align your team. Financial analysts rely on these metrics to assess historical financial data and determine the financial implications of new strategies.
The Business Benefits of Building a Financial Model
When executed correctly, a financial model isn’t just a back-office function: It becomes a front-line leadership tool.
These are the perks of building a high-performing financial model:
- See around corners: A good financial model helps you spot risks before they become emergencies. You can take corrective action with the foresight to anticipate challenges in advance.
- Make informed, data-driven decisions aligned with a sound financial strategy: Models turn instinct into insight, and ensure data backs your moves. Your model becomes the backbone of decision-making and supports hiring, pricing, investment, or cost-cutting choices.
- Unlock capital or funding readiness: A well-built model inspires investor trust and unlocks funding by signaling your business’s financial health. It’s also a key step in raising capital efficiently. An investor-ready model demonstrates foresight, scalability, and credibility. It may include valuation models such as discounted cash flow analysis or net present value calculations.
- Adapt quickly to change: Your financial model allows you to test different scenarios before taking action and pivot with less guesswork.
- Align your leadership team: A central model creates shared understanding among leadership. This means everyone plans using the same assumptions and numbers.
How to Build a Financial Model: A Step-by-Step Approach
Wondering how to build a financial model for your organization?
Here’s how to build financial models with clarity and strategy:
- Define your goals: Start with the “why.” What questions do you need your model to answer? Are you planning for growth? How about cost optimization or funding prep? Clarity on your objectives shapes everything that follows, from the data you include to the structure you choose.
- Identify your key drivers: What are the core business drivers behind your financial performance? Identify revenue sources, cost centers, and major expenses that move the needle in your business.
- Gather your financial data: Model accuracy starts with your historical data. Ensure you’re working with clean, up-to-date information from integrated systems. This includes reviewing your company’s income statement, cash flow statement, and supporting schedules. The goal is to build from reality, not guesswork.
- Choose your modeling structure: Your goals determine your modeling needs. A simple P&L forecast might be enough for short-term planning or simple businesses. You may need multi-scenario planning or complex cash flow models. Consider the decisions you’re facing now and the level of insight you need to move forward. Using effective forecasting tools can significantly enhance accuracy and speed.
- Build the model (or partner with experts who can): This is the execution phase, where many teams hit a wall. That’s because actually building your model requires in-depth financial expertise, paired with an understanding of how your business operates. You can either handle this in-house or partner with experts who can design your model to align with your goals (such as Nimbl).
- Stress-test your assumptions: No model is complete without testing. Stress-testing your financial assumptions ensures your forecasts remain realistic and actionable. What if costs spike unexpectedly? Use sensitivity analysis to model what happens if revenue dips by 20%. Also, use benchmarks or comparable company analysis to validate your inputs. Incorporating a discounted cash flow (DCF) model helps estimate free cash flows and assess interest rate impacts over time.
- Review, refine, and update regularly: Models aren’t “set it and forget it.” They should be a living tool that evolves with your business. Regularly revisit your model, assess its performance, and update it as needed.
Common Mistakes to Avoid When Building a Financial Model
Even with the best intentions, it’s all too easy to build a financial model that falls short. Advanced financial modeling might even include a leveraged buyout model for valuation scenarios.
At Nimbl, we’ve seen the pitfalls that can hinder decision-making, confuse leadership, and mislead stakeholders.
With your models, be sure to avoid risks like:
- Overly complicated or hard-to-maintain models: A model is only useful if it’s practical. If you or your team can’t use it, the model becomes a liability instead of an asset. That’s why Nimbl builds powerful yet simple models.
- Relying on unrealistic assumptions or “hopeful math”: It can be tempting to model best-case scenarios or bake in aggressive growth assumptions. But grounded, data-backed assumptions are more useful, realistic, and will hold up to scrutiny.
- Missing key revenue or expense drivers: Leaving out major cost centers, underestimating churn, or failing to segment revenue channels can contribute to misleading outputs. Nimbl ensures all critical levers are captured so your models are accurate. This can include methodologies like discounted cash flow to value long-term opportunities or calculations like net present value to assess investment decisions.
- Ignoring cash flow in favor of P&L alone: A business can look profitable on paper and still run out of cash. That’s why it’s important always to include robust cash flow forecasting in your models.
- Failing to update the model as the business changes: The market changes quickly. Teams grow. New products launch. If your model is static, it will soon become outdated.
How Nimbl Helps Leaders Build Smarter Financial Models
At Nimbl, we believe a financial model is more than just a spreadsheet: It’s a valuable leadership tool. That’s why our financial modeling is rooted in strategy, clarity, and execution.
How exactly? First, we identify the right drivers to model, based on your business’s unique revenue patterns and cash cycles. Next, we combine cloud-based tools with strategic finance solutions, including financial modeling software, to build models you’ll actually use (instead of sitting in a folder).
Our partnerships are also designed to be ongoing. Models are continuously reviewed, updated, and optimized as your business grows, so you’re continually prepared for growth.
Our work also supports critical investor conversations, funding readiness, long-term planning, and even collaboration with investment banking partners.
At Nimbl, we don’t just help you build a financial model. We help you lead with one.
Turn Financial Planning Into a Strategic Advantage
Learning how to build a financial model isn’t about predicting the future perfectly: It’s about preparing to make smarter moves as the future unfolds.
If you’re ready to improve your financial modeling and take control of your business’s growth, we’re here to help. Learn financial modeling techniques that support business plan development and align with your core business operations and company strategy.
At Nimbl, we provide scalable solutions and strategic expertise and deliver financial models that drive clarity and confidence.
Ready to build a model that supports your next big move?
