The magic of it allJan 01, 2022
“Once I learned how to do this, I realised – wow, this stuff is really powerful! It's one of those things that's been mythologised, but is actually pretty straightforward.”
This is the reaction of a founder who has just learnt about financial modelling. I was wondering whether he could see the value of developing a financial model, or whether I would need to spend some time convincing him that it’s worth doing it. It didn't take long – and as you can see, he's now pretty convinced.
His enthusiasm reinforced something I’ve been thinking about for a while. Many founders seem to think it’s some sort of magic that determines whether you end up with a financially successful company. But successful companies don’t happen by magic, they happen by design.
And that design is stress tested and validated over time through your financial model – that spreadsheet that helps you predict what will happen to your finances in the next year, two years, five years. It puts things into perspective, it shows you the ripple effect of major decisions on the numbers, it directs your attention to what’s important. It’s a bit like building a house and making sure the structure doesn’t break as you go – but better yet, it alerts you months, even years in advance if there’s a problem.
Yes, there is a time and place for financial modelling. If you don’t yet know what your product or service is, what you’re selling and to whom, then you should definitely focus on that first. But once you’re actually bringing in revenue and are growing, it’s good to model it all out.
Love and cash flow,
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