What the Model Is For

Two purposes

A startup financial model serves two audiences and both matter:

• Internal management — how much cash do we have, how long does it last, what happens if we hire two people, can we afford this campaign, when do we need to raise.
• External investors — do the founders understand their business, are the assumptions credible, what does the capital buy, and what could this become.

The same model can serve both if it is built around drivers rather than around a desired outcome. A model constructed by picking a revenue target and working backwards to make it arrive is neither useful internally nor credible externally, and experienced investors identify it in minutes.

What investors actually examine

Not the revenue number in year five, which everyone knows is wrong. They look at:

• Whether the assumptions are stated and defensible.
• Whether the growth logic is mechanical — how many customers, acquired how, at what cost — rather than a percentage applied to a previous number.
• Whether unit economics work and when.
• What the cash requirement is and what it buys.
• Whether the founders understand which numbers matter.

A conservative model with sound reasoning is far more persuasive than an aggressive one with none.

Structure

A good model separates its parts clearly:

• Assumptions — every input, in one place, clearly labelled, with a note on where each came from. Nothing hard-coded inside a formula.
• Calculations — the working, driven entirely by the assumptions.
• Outputs — profit and loss, cash flow, headcount, key metrics.

The test of the structure: can someone change one assumption and see the effect flow through everything? If not, the model cannot be used for decisions, which is its main purpose.

Practical construction

• Monthly for the first two years, where cash timing matters; quarterly or annual thereafter.
• Consistent formulas across each row so errors are visible.
• Colour conventions distinguishing inputs from calculations.
• Sanity checks built in — revenue per employee, growth rates, margins — that flag implausible results.
• Simple enough to be understood and maintained. An elaborate model nobody updates is worse than a rough one that is current.