Currently, building a financial model that produces accurate forecasts is a major challenge, especially for companies experiencing exponential growth.
However, when the forecasting model is done correctly, it becomes possible for the company to predict what is to come, allowing for more detailed investment planning and avoiding expenses that could compromise business profitability. However, we also know that operationalizing this model requires many trials and errors and numerous detailed processes.
When a startup engages in financial modeling for the first time, it can be a very challenging experience, but the long-term results are rewarding.
"The model you create for your company will always be wrong." "The act of modeling is what's good," said Miran Ahmad, angel investor, experienced startup CFO, and former vice president of finance at healthcare infrastructure provider Truepill, during a webinar sponsored by Oracle NetSuite.
Ahmad and the webinar host, Eric Bahn, co-founder and general partner of early-stage venture capital firm Hustle Fund Management, made it clear that startup investors want to see (know) that founders are thinking about the future and that they are able to project for the next three years.
Engaging in the financial modeling process is one way for the startup to demonstrate its commitment to the long-term vision so highly valued by investors.
“It’s incredibly impressive when the founder knows everything so clearly,” said Ahmad. “As an angel investor, I always want to see that.”
Bahn also commented during the webinar that he has much more confidence in startup founders who are trying to "level up" their companies through financial modeling.
"Even though I know it's going to be completely wrong, it still tells me that you're thinking about your business," said Bahn.
The ability to make assumptions based on historical data is a fundamental aspect of financial forecasting. That's why Ahmad recommended that startups pay special attention to creating accurate historical data. "If they don't, they are subject to the dreaded reality of working with inaccurate data and making predictions with a large margin of error," he commented.
In other words, the more complete and accurate a company's historical data is, the more accurate (I repeated accurate, I would say assertive) and valuable its financial model will be.
“The model improves with engagement,” said Ahmad. “Modeling forces the company to think more deeply about data access.”
“When financial models are effectively built with access to the necessary data in real time, it is possible to make realistic projections that can guide companies to make the best business decisions, knowing exactly where to invest in the short and long term. Over time, as these financial models mature, they can demonstrate much more predictive scenarios, serving as a kind of crystal ball,” comments Ahmad.
Therefore, it is essential to implement an integrated business management system that provides accurate, real-time data. This will allow the startup to develop its financial models more precisely and attract the best investments in the market.
Want to learn more about how using business management software can help in the process of developing financial models?
Contact Active Cloud Solutions, the largest Oracle NetSuite consulting firm in South America, and request a demo today.
