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What is business modeling?
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Anyone who has ever considered embarking on an entrepreneurial venture has probably gone through a business modeling phase.
First things first: what is a financial model?
A financial model is a dynamic spreadsheet created with Microsoft Excel, Google Sheets or Numbers, that presents in numbers the way a company intends to establish and increase its profitability.
In other words, it is the demonstration of how a company plans to bring value to its customers and shareholders at a given cost.
Screenshot of Simple As A Plan‘s strategic and financial model templates
What is the purpose of a financial model?
A financial model is a decision-making tool intended to be used by people inside and outside the company for a variety of purposes: estimating the viability of an idea or project, convincing future partners, raising capital, allocating capital, budgeting, forecasting, or evaluating a company, to name a few.
What is business modeling?
Simply put, business modeling is the art and science of modeling each of the elements that influence the development a company over a 3 to 5 year period.
When the modeling of a company is well done, it is close to an application.
What is being modeled?
Business modeling aims to model:
1° all strategic aspects of the company, such as a customer acquisition strategy, how these future customers will interact with the company, revenue streams, hiring plan, costs and depreciation;
2° these strategies will produce performance metrics, such as the number of active customers, repeat customers (if any), purchases per customer, customers lost along the way (CHURN) and the CAC (Customer Acquisition Cost);
3° finally, these different elements put together will be translated into financial statements: P&L, balance sheet, cash flow statement, corporate taxes, and KPIs.
4° at Simple As A Plan, we add an additional strategic phase: the way the company will finance its cash flow needs and the impact this strategy will have on the founder(s) and successive shareholders (dilution and capital gain).
To learn more about what business modeling is, you can visit the How our models work page on our website which presents each of the tabs that make up our financial model templates:
- Model Settings
- Financial Statements
- KPI
- Charts
- Users Acquisition
- Web Traffic
- Signups
- User Behaviors
- Active Buyers
- Active Sellers (for two-sided models)
- Monetization
- Revenue
- Tasks Automation
- Hiring Plan
- Operating Costs
- Investments
- Capex & D&A
- Financing
- Loan (if any)
Why do we consider business modeling an art and a science?
Because modeling a business professionally is far from easy.
You can be a great entrepreneur and not have the skills to accurately model your business, or at least model it in a way that is compelling to future partners and investors.
– for more information on this subject, we invite you to read the article Why is it smart to buy a ready-made financial model template? –
Business modeling requires experience and a combination of skills: in Microsoft Excel, Google Sheets or Numbers of course, in marketing, in business development, in HR, in finance, or in fund-raising.
But it also requires skills in UX, because doing business modeling is also and above all developing a tool that must be used by a variety of profiles inside and outside the company.
So it’s not just about putting numbers in a spreadsheet…
If your financial model is too detailed, it will discourage those who need to use it. If it is not detailed enough, it will lack credibility.
The storytelling of the model is also very important. To understand why, we invite you to read the article How to choose the right financial model template?
To do business modeling optimally, you need to have confronted many financial models with investment fund analysts and considered their feedback.
Why is it important to have a good financial model of your current or future business?
Some entrepreneurs consider that business modeling is not so important because it is impossible to predict the future: no matter what the projections are, they are bound to be wrong.
This is both true and false:
It’s true because we can’t predict everything when modeling a new business. The factors involved in the success or failure of a company are numerous and not always tangible. The first of them being the human factor. The pandemic we have experienced, and the positive or negative impacts it has had on many companies, is another good example.
It’s false because with experience there are many things that can be modeled and anticipated, including and especially the risk factors. A good financial model is therefore supposed to include positive and negative moderating factors.
Finally, it’s false because, even if the analysts of investment funds welcome financial forecasts with a certain caution, the different elements considered during its elaboration say a lot about the level of maturity of the entrepreneur who has drawn it up. It is therefore far from being anecdotal.
But having a good financial model of your company has other advantages and functions.
To name just two:
1° it is cheaper to make strategic mistakes in a spreadsheet, to be aware of them and to correct them, than to make these mistakes once your business is launched;
2° having a good financial model makes it easier to get your teams to agree on the strategic directions you want to adopt. In other words, a strategy is never as “saleable” as when it is accompanied by tangible forecasts, expressed in a concrete and rational way.
Who is business modeling for?
Business modeling is relevant to all types and sizes of businesses and at all stages of their development.
Business modeling is also used by many consultants, such as brand strategists or marketers, when they want to convince their clients to adopt their recommendations.
Start modeling your business today!
Download the financial model template that fits your business, fill it out to validate your vision and get funded.
Download the financial model template that fits your business, fill it out to validate your vision and get funded.
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By The Business Modeler
The Business Modeler is a collective of experienced entrepreneurs and consultants.
Start modeling your business today!
Download the strategic financial model template that fits your business, fill it out to validate your vision and get funded.
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