What a financial model consists of

What does a financial model consist of? For planning purposes, two forms of financial model are usually used. The first is the financial plan of income and expenses, the profit and loss statement, or P&L. It shapes the startup's development strategy and is built using the accrual method. That is, accounting is tied not to the actual movement of cash but to the date when services are rendered or goods and products are transferred. The cash flow statement is used for the day-to-day management and planning of cash flows. It is built using the cash method: for amounts to be recognized as income or expenses, an actual movement of money is required.

To build these forms, you need to define forecasts for revenue-related financial indicators: the project's life cycles, the number of customers, the sales plan, the average order value. Essentially, the overall revenue forecast, income from services, seasonality, and the overall market dynamics. Operating expenses: how much money goes each month on purchasing raw materials, consumables, third-party services, rent, employee salaries, marketing, and so on. External factors: what will affect the business and how, such as inflation, exchange rates, tax rates, purchase prices, and so on. Mandatory payments and loans, taxes, and state fees.

Capital expenditures: spending on equipment, premises, and vehicles. This is part of cash flow, and depreciation is charged on these assets. The amount of financing: how much has already been invested and how much more the founders, investors, and lenders plan to invest in the business. This is also part of cash flow. In addition, you can calculate the project's efficiency. NPV, net present value, is the sum of incoming and outgoing cash flows as of the date when the investor would like to receive a return. For example, three years after the investment. A negative NPV tells the investor that the project's costs have exceeded the amount invested.

IRR is the internal rate of return. It is the interest rate at which NPV equals zero. It shows the project's average return over a certain period, for example, a year. In other words, IRR reflects how much an investor who has invested in the company will receive. PP is the payback period, the minimum period over which the launch costs will pay off. To calculate it, you need to forecast how much profit the business will generate each year and work out when the cumulative profit will exceed the amount of investment. The longer it takes for the investment to pay off, the less attractive the company is considered.