If you have a great business idea but don’t know how to show the numbers behind it, investors may not take you seriously. This is where a financial model helps. It is a plan that shows how your business will make money, spend the amount, and grow over time. It helps you understand your business better and shows investors that you are well-prepared. When done correctly, a financial model builds trust in the potential funder. However, if it’s full of confusing numbers or unrealistic expectations, it can scare investors away. So, let’s learn how to create a model that investors trust.
What makes a financial model trustworthy?
A financial model is more than just numbers — it’s a tool that tells the story of a business’s future performance. Before we look at how to build a financial model, let’s understand what makes a model good and believable.
-
Transparency: Your model should clearly show how you reached your numbers. For example, if you say you will grow 20% every month, explain why. Is it based on your marketing plan or customer demand?
-
Realism: Be honest and practical. Don’t show very high profits in the first few months unless you have strong proof. Use numbers that match your market and industry.
-
Flexibility: Your model should be ready for changes. What if your costs go up? or your sales go down? You should be able to adjust the numbers easily.
-
Simplicity: Keep your model easy to understand. Use simple formulas and clear headings. If the model is too complicated, investors may not understand it.
Steps to build a strong financial model
Creating a financial model may sound difficult, but if you follow a clear step-by-step process, it becomes much easier. Here’s a simple way to build a financial model in 2025, especially useful for startups and small businesses:
1. Define the goal of your model
Start by asking yourself: Why am I making this model? Is it to raise funds? To plan a budget? or to check if your business will make a profit?
Also, decide what period (like 1 year or 3 years) your model will cover and what areas (like sales, costs, cash flow) you want to include.
2. Gather the right information
Now, collect all the data you need. This includes:
- Past numbers (if your business is already running)
- Market research and competitor data
- Industry trends
- Business assumptions like how fast you’ll grow, how much you’ll charge, and what your costs will be
These assumptions will help build your model step by step.
3. Plan the layout
Next, decide how your model will look. A clean and well-organised model is easier to understand.
You can divide your model into different tabs or sections like:
- Assumptions
- Revenue
- Expenses
- Cash flow
- Profit and loss
Keep it neat and logical so anyone looking at it can easily follow the flow.
4. Build each section in detail
Now it’s time to build the actual worksheets. Start creating sheets for:
- Revenue (money coming in)
- Costs (money going out)
- Cash flow (timing of money movement)
- Balance sheet (assets and liabilities)
Use simple formulas and refer back to your assumptions while filling in the numbers.
5. Add formulas and calculations
Use spreadsheet tools like Excel or Google Sheets to apply formulas. These formulas will calculate things like:
- Monthly sales
- Total expenses
- Tax amounts
- Net profit
Make sure all calculations are connected to your assumptions so you can update your model easily in the future.
6. Test different scenarios
Things don’t always go as planned. So, check how your model performs under different situations:
- What if your sales drop?
- What if your marketing costs increase?
This is called sensitivity analysis or scenario planning. It helps you prepare for the best and worst outcomes.
7. Review and document everything
Finally, double-check your model. Make sure your numbers add up and your formulas work correctly. Also, write down all the important assumptions and how you did your calculations. This will help investors or your team understand the model easily.
Real-life example: How Nykaa's smart financial planning won investor trust
Nykaa is a popular Indian company that sells beauty, fashion, and wellness products online and in stores. The brand used a strong financial model to grow its business and win investor trust.
Here’s what they did right:
1. Profitable before going public
Unlike many startups that take years to make a profit, Nykaa became profitable before launching its IPO. This showed investors that the company had a strong foundation and was managing its money wisely.
2. Fast revenue growth
Nykaa’s income kept growing year after year. This consistent growth showed that their business model was working and could be trusted to perform well in the future too.
3. A successful IPO
When Nykaa went public, a lot of people wanted to invest in the company. The strong response from investors showed that they believed in the brand’s financial planning and future potential.
4. Multiple revenue sources
Nykaa didn’t just rely on one product or platform. They marketed a huge variety of beauty and fashion items through both their app and physical stores. This mix helped balance their business and reduce risks.
5. Smart financial planning
Nykaa created a detailed financial model that included income predictions, cost control, and cash flow planning. This helped them make better decisions and use their money wisely.
Things to keep in mind
While building a financial model is important, there are a few simple things you should always keep in mind to make it more useful and trustworthy.
- Keep your model updated: As your business grows or changes, your numbers will too. Make sure to update your financial model regularly.
- Know who you’re sharing it with: If you’re showing your model to investors, focus on things like profit and future growth. If it’s for your team, include more details about day-to-day costs and planning.
- Be honest about risks: It’s okay to talk about possible problems. Investors prefer honesty and like to see that you’re ready for challenges.
- Test your numbers: Don’t just assume everything will go perfectly. Check what happens if sales are lower or costs are higher than expected.
Conclusion: Why does a good financial model matter?
A financial model doesn’t need to be perfect, but it should make sense. It should show that you understand your business, your market, and your future goals. When investors see a simple, clear, and realistic model, they are more likely to trust you. They feel confident that their money is in good hands. So, take the time to build your financial model properly. It can help you make better decisions and bring your business idea to life.
