If you're raising capital, a strong financial model is one of the most important tools you'll need. It shows investors how your business works, where it's going, and what kind of return they can expect. This page walks you through how to build a reliable, investor-ready financial model—one that clearly outlines your assumptions, explores different growth paths, and includes realistic valuation projections.
A well-structured model proves you understand your business's financial drivers and gives investors the data they need to make informed decisions.
Key Components of an Investor-Ready Financial Model
Assumptions
Your model should start with clear, well-documented assumptions. These are the inputs that drive your projections, so transparency here is key. Common assumption areas include:
Revenue Drivers: CAC, ARPU, churn rate, product-level sales growth, market penetration.
COGS: Materials, labor, fulfillment, and how those costs scale.
Operating Expenses (OPEX): Headcount plans, marketing, R&D, general admin costs.
Capital Expenditures (CAPEX): Major investments and depreciation schedules.
Financing Assumptions: Debt terms, equity fundraising timelines, and cost of capital.
Macroeconomic Factors: Inflation, industry trends, and other external inputs.
Use real data wherever possible—like market research or historical performance—and explain your reasoning when using estimates.
Historical Financial Data (If Available)
If your company has been operating for a while, include 3–5 years of historical financials:
Income Statement
Balance Sheet
Cash Flow Statement
This helps investors understand your baseline and evaluate how your business has performed over time.
Projected Financial Statements
Build forward-looking statements based on your assumptions. These typically span 3–7 years and include:
Projected Income Statement: Revenue, COGS, gross margin, OPEX, and net income.
Projected Balance Sheet: Assets, liabilities, and equity projections.
Projected Cash Flow Statement: Cash flow from operations, investing, and financing.
These statements help investors assess your potential for growth, profitability, and liquidity.
Growth Scenarios
Investors want to see that you've considered more than one possible future. Include 2–3 growth scenarios—usually a base case, optimistic case, and conservative case. Vary key assumptions like sales growth or CAC in each case and clearly explain the differences.
Key Metrics and Ratios
Highlight the metrics that matter most for your business model and industry:
Growth: Revenue growth, customer growth
Margins: Gross, operating, and net profit margins
Efficiency: CAC, LTV, churn
Liquidity: Current ratio, quick ratio
Solvency: Debt-to-equity ratio
Show how these metrics trend over time and what they reveal about your company’s performance.
Valuation Projections
Include valuation estimates based on relevant methods for your industry and stage:
Discounted Cash Flow (DCF): Project free cash flow and discount it using WACC.
Comparable Company Analysis (Comps): Use valuation multiples from public or recently acquired companies.
Precedent Transactions: Reference past deals in your industry.
Be sure to explain how you chose your methods and assumptions.
Sensitivity Analysis
Show how your valuation or financial projections change when key assumptions are adjusted. This helps investors understand the range of possible outcomes and shows that you've thought through different risk scenarios.
Cap Table Projections
If you’re raising money, include a projected cap table to show how ownership will change after the funding round. This should outline:
Existing equity holders
New investor ownership
Option pool size
Post-money valuation and dilution impact
Presenting Your Model
A good model is not just accurate—it’s also easy to navigate and understand. Here are a few tips to make your model presentation-ready:
Keep it organized: Use consistent formatting, labels, and color coding.
Be transparent: Clearly document your assumptions and formulas.
Use visuals: Charts and graphs help communicate trends and insights faster.
Keep it concise: Summarize key insights without overwhelming investors with data.
Connect to your strategy: Make sure your numbers support your growth narrative.
By building a clear, thoughtful, and well-supported financial model, you’ll be better prepared for investor conversations—and better positioned to secure the capital you need to grow.
Mike Torello
CFO,LOREM IPSUM CORPORATION