Understanding the 3-statement financial model for startups is crucial to general business growth and expansion. This is because it is also very essential aiding Startups gain their footing.
Creating a 3-statement financial model for startups involves developing the Income Statement, Balance Sheet, and Cash Flow Statement. These three statements are interconnected and provide a comprehensive view of the company’s financial performance and position.
Here’s a step-by-step guide to creating such a model:
Income Statement
The Income Statement, or Profit and Loss Statement, shows the company’s revenues, costs, and expenses over a specific period.
Some of the key components to be used are:
- Revenue: Sales or service income
- Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold by the company
- Gross Profit: Revenue – COGS
- Operating Expenses: Selling, General & Administrative (SG&A), R&D, and other expenses
- Operating Income: Gross Profit – Operating Expenses
- Other Income/Expenses: Interest income, interest expense, etc.
- Net Income: Operating Income + Other Income/Expenses – Taxes
Balance Sheet
The Balance Sheet provides a snapshot of the company’s financial position at a specific point in time, detailing assets, liabilities, and equity.
The key components under this category are:
- Assets
Current Assets: Cash, Accounts Receivable, Inventory
Non-Current Assets: Property, Plant & Equipment (PP&E), Intangible Assets
- Liabilities
Current Liabilities: Accounts Payable, Short-term Debt
Non-Current Liabilities: Long-term Debt
Equity: Common Stock, Retained Earnings
Cash Flow Statement
The Cash Flow Statement shows the company’s cash inflows and outflows over a period, divided into operating, investing, and financing activities.
The core parts of this step are:
- Cash Flow from Operating Activities (CFO): Net income adjusted for non-cash items and changes in working capital
- Cash Flow from Investing Activities (CFI): Purchases or sales of assets, investments
- Cash Flow from Financing Activities (CFF): Borrowings, repayments, equity issuances
Building the 3-Statement Model
Here are some key points that are accepted to be important for consideration in the building of the 3-statement financial model for start-ups:
- Revenue Projections
– Estimate monthly or quarterly sales based on market research, pricing strategy, and sales forecasts.
– Consider different revenue streams and their growth rates.
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Expense Projections
– Calculate COGS based on production costs, labor, and material expenses.
– Project operating expenses by analyzing fixed and variable costs.
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Income Statement Preparation
– Aggregate the revenue and expenses to compute Gross Profit, Operating Income, and Net Income.
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Balance Sheet Items
- Assets: Project current assets (cash, accounts receivable, inventory) and non-current assets (PP&E, intangible assets).
- Liabilities: Forecast current liabilities (accounts payable, short-term debt) and long-term liabilities (loans).
- Equity: Calculate equity based on initial investments, retained earnings (cumulative net income), and any additional capital injections.
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Cash Flow Statement Preparation
- CFO: Start with net income and adjust for non-cash items (depreciation, changes in working capital).
- CFI: Include cash used for buying assets or received from selling them.
- CFF: Add cash inflows from issuing shares or debt and outflows from repaying debt.
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Interlink the Statements
– Ensure the Net Income from the Income Statement flows into the Equity section of the
How to Maintain Finances as a Startup
By implementing these strategies, you can maintain a strong financial foundation for your startup, enabling sustainable growth and long-term success.
Maintaining finances as a startup is crucial for long-term success. Here are some key strategies to help manage your startup’s finances effectively:
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Create a Detailed Budget
– Projected Income and Expenses: Outline all expected sources of income and categorize your expenses.
– Cash Flow Projections: Estimate your cash inflows and outflows to avoid shortfalls.
– Regular Review: Update your budget regularly based on actual performance.
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Separate Personal and Business Finances
– Business Bank Account: Open a dedicated business account to keep finances distinct.
– Credit Cards: Use a business credit card for company expenses.
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Track All Expenses
– Expense Management Software: Tools like QuickBooks, FreshBooks, or Expensify can help.
– Receipts and Invoices: Keep detailed records of all transactions.
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Monitor Cash Flow Closely
– Weekly Reviews: Regularly review cash flow statements.
– Accounts Receivable: Ensure timely invoicing and follow-up on overdue payments.
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Maintain an Emergency Fund
– Contingency Planning: Set aside funds to cover unexpected expenses or downturns.
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Control Costs
– Fixed vs. Variable Costs: Identify essential fixed costs and scrutinize variable costs for potential savings.
– Negotiations: Negotiate with suppliers and vendors for better rates.
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Seek Professional Advice
– Accountants: Hire an accountant or financial advisor for expert guidance.
– Legal Advice: Consult with a lawyer to ensure compliance with financial regulations.
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Utilize Financial Software and Tools
– Accounting Software: Automate and streamline financial management with software like Xero or Zoho Books.
– Financial Dashboards: Use dashboards to get a real-time overview of financial health.
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Plan for Taxes
– Understand Obligations: Be aware of tax deadlines and requirements.
– Set Aside Funds: Allocate money for taxes to avoid year-end surprises.
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Explore Funding Options
– Grants and Loans: Look into small business grants or loans.
– Investors: Seek venture capital or angel investors if necessary.
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Measure Financial Performance
– Key Metrics: Track important financial metrics such as burn rate, runway, gross margin, and net profit.
– Benchmarking: Compare performance against industry standards.
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Regular Financial Audits
– Internal Audits: Conduct regular audits to ensure accuracy and identify areas for improvement.
– External Audits: Consider external audits for an objective assessment of financial health.
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Educate Yourself and Your Team
– Financial Literacy: Enhance your understanding of finance and ensure your team is knowledgeable as well.
– Continuous Learning: Stay updated with financial best practices and industry trends.
