This video frames your understanding and expectations for how you should use your financial model and what it's benefits for your company are.

The 3 main purposes of your financial model:

  1. Simplify your business and make presenting / understanding your business easier

  2. Set performance targets and measure your success against those targets

  3. Prevent you from running out of Cash by providing clear visibility of how much you spend vs how much you earn. Enable you to make an informed decision on when you can expect your "runway", or usable cash, to run out.

How does it do each of these things?

  1. Simplifying Your Business: When inputting information into your model you simplify typically in two ways- averaging price points and behaviors across a manageable, but still insightful, number of tiers (usually no more than 3) and grouping expenses into few, but accurate, large bucket items as opposed to putting them in individually down to every hammer and nail.

  2. Performance Targets: By developing an initial forecast and then going back each month to input your historical data, you're able to see your performance against expectations to see areas of weakness, realign your goals based on that performance, and put real world plans in place to improve the areas that are necessary. Mathematically you can also change numbers from the current values at future dates to see if, for example, lowering your COGS helps profitability in the near-far term, or if raising your prices seems like a feasible approach to supplement lower than expected volume.

  3. Don't Run Out of Cash: Your financial model speaks all the languages of your company: how you get more customers in customer acquisition, what and how you charge them in revenue streams, the people you have hired and plan to hire next in "People", the costs you sustain month to month in Expenses, and your balance sheet items that also affect cash by costing you more money or bringing in additional funds. Because of this, it's the best, and perfect tool to "simulate" your spending expectations and give you insight to how far you can expect your bank account to take you given some current expectations.

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