7 Common Financial Modeling Mistakes for Startups

Financial modeling has proven itself to be an indispensable tool for startups and founders. An entrepreneur might create a financial model for garnering investor interest or strategic planning, such as calculating runway and deciding budgets. However, financial modeling typically involves an Excel spreadsheet where complexity and confusion can increase without the proper precautions. Before diving into a spreadsheet without a concrete plan, check out the following common financial modeling mistakes for startups. Keep reading if you’re interested in how Sturppy can solve these problems for you.

1. Hardcoding projections and assumptions

The rule is that only revenue and costs should be inputted manually; the rest of the model should then adjust according to these inputs. If additional values are hardcoded, you increase the complexity of the model, make it more difficult to go back and change inputs, and risk hiding certain assumptions. Perhaps, worst of all, hardcoding values showcases a lack of discipline. Other individuals or investors might be skeptical of your capabilities and doubt the reliability and transparency of your company.

To help alleviate some of these issues, double-check that only two values are hardcoded: revenue and cost (sometimes called expenses assumptions). Remember that the majority of your model should come from interlinked cells and formulas that update dynamically given different inputs.

2. Inconsistent Formatting

Typically the “inputs” is “assumptions” tab should be first in the Excel file since it determines the results of all subsequent projections. Good organisation reduces the complexity of your model, making it more accessible to different viewers. This is also important since models can be shared, presented, and printed.

Remember organisation and formatting are not technical issues that require additional skills or expertise. Simply put, they require a little more time, discipline, and empathy for others viewing your work. Similar to how a SaaS product must be clear and understandable to potential users, make the same effort in your financial model if you’d like to reduce any possible friction.

3. Syntax Errors

Some other common syntax errors include:

  • Mixing up positive and negative numbers in a cash flow statement
  • Forgetting or misplacing brackets. =A1+B1*360 does not equal =(A1+B1)*360
  • Naming cells and entering the wrong name. Try to avoid naming cells and keeps the default naming convention

One possible solution is to use checks throughout the spreadsheet to verify calculations. Similar to the inputs tab, still keep all checks in a single tab to stay organised. Also remember that the Balance Sheet should always balance, so the sum of all assets should equal the sum of all liabilities and equity.

4. Long and Other Avoidable Formulas

Keep your model simple. One of the best fixes is to break the problem down into smaller pieces. You can do this by using multiple columns to create a formula that will either return a single or multiple values.

5. Avoid Daisy Chains

6. Naming Convention of Files

Always try to reduce the possibility for human error. Of course this does require some discipline. It’s much too easy to name a model under “model_4” and forget its purpose entirely. Instead try to be rather specific as you name your files. Keep in mind the extra time spent naming your files decreases the chance of presenting an incorrect version in the future.

7. Incorrect Sums

To avoid this, use the SUBTOTAL function to add together all values that are not already subtotals. =SUBTOTAL(C1:C7) would calculate the correct sum even though the same values are specified as in the last example.

Conclusion

Founder of Sturppy.com