Ben Alderson Financial

Build a Financial Model

A financial model is a tool that helps Founders and Business Owners create a financial blueprint for their business. Many people think financial models are complicated and difficult to build, but that’s just NOT true! You can build a simple and very useful financial model for your business very easily, but first your need to understand a few simple calculations, starting with the simplest calculation for profit:

Revenue

-

Costs

=

Profit

Now we need to differentiate between Fixed Costs and Variable Costs. Fixed Costs stay the same from month to month regardless of the performance of the business, whereas variable costs increase as the business performs better or decrease as the business performs worse.

A good example of a fixed cost would be the monthly internet cost incurred by an online seller, because they will pay their internet provider the same amount each month for the duration of the contract, regardless of how many products they sell. A good example of a variable cost would be the commission the online seller pays to the digital sales platform they use (Lazada, Shoppee, etc etc) because they will pay more in total commissions the more items they sell, and vice versa. So:

Revenue

-

Variable Costs

-

Fixed costs

=

Profit

Next, we can expand each part of the equation to one lower level of detail:

Now that we have this more detailed equation for profit, we can identify 5 individual building blocks we need to consider when building our financial model:

Revenue

Units sold X price per unit

-

Variable Costs

Units sold X VARIABLE COST per Unit

-

Fixed Costs

Add up all the FIXED COSTS

=

Profit

Now that we have this more detailed equation for profit, we can identify 5 individual building blocks we need to consider when building our financial model:

Units sold
X
price per unit

-

Units sold
X
VARIABLE COST
per Unit

-

Add up
all the
FIXED COSTS

=

Profit

Unit (of sale)

the ‘thing your Customer buys from you’, for online sellers this could be a physical product, for consultants it could be an hour of your time and for software companies it could be a month’s subscription to your software or a transactional fee for each use.

Sales Forecast

the number of units you forecast you will sell to your customers.

Price per Unit

the price of each unit you sell to your Customer.

Variable Cost per Unit

any cost you can directly attribute to the sale of each unit.

Fixed Costs

any costs that your business incurs regardless of how many units you sell.

Now that you know about these 5 building blocks, you can start to build your own financial model! And to help you get started, I have created a simple financial model starter template that you can download right here. Just follow the instructions on each page to populate the five building blocks for each month that you want to include in your projections!

Once you have completed the first version of your financial model you should continue to use it as a living, breathing tool to help you continue to manage your business:

  • Test the impact on your forecast profit of reducing your costs or increasing your price point or sales forecast.
  • Simulate the impact of unexpected costs to see how your business would stand up.
  • Calculate the extra capital you will need to fund your growth plans!

Download Your Free Financial Model Template Here

ben alderson financial