Getting a startup company off the ground is much like building your dream house. While you may think you’re ready to start building after you’ve found the perfect plot of land, you wouldn’t want to rush the process without a sound blueprint.
Likewise, you need to prioritize the development of a financial model for your company before implementing your overall business plan. Doing so would give you a good guide when it comes to decision-making processes regarding your startup’s future.
To help you polish your financial model, here are some common mistakes you need to avoid as identified by finance strategist Lisa Smith.
Keep it Simple
The first mistake Smith notices is that some entrepreneurs come up with a complicated financial model right out of the gate. Worse, this sets them on a path that sees them adding unnecessary elements to their models as a way to justify the amount of time they spent going through various details.
Avoid Rabbit Holes
In her experience of wading through other people’s financial models, Smith noticed how some would link a cell’s content to sheets that aren’t included in the excel workbook with the financial model.
She reminds people that these plans also need to be seen by others and, thus, should be user-friendly. This means refraining from creating ‘rabbit holes’ and not consolidating multiple factors in a single cell.
Another way you can keep your financial model’s spreadsheet user-friendly is color coding items.
For example, Smith shares that she typically uses a gray fill with a white text font for column descriptors and headers. She also uses a different font color to identify data that are sourced from an external sheet and internal calculations found within the sheet.
Whatever color scheme you come up with, make sure to keep it consistent to avoid confusion and easy comprehension.
Keep Track of Versions
It’s only normal that you go through several versions of your financial model before finalizing it. However, it’s important that you keep track of which is which.
To do so, Smith suggests naming your files in descriptive terms to give you an idea of what to expect even before opening it. You can also email yourself the version of your model that’s been completed and presented as a reminder.