How to Build a Basic Financial Model

500 Startups Vietnam

February 26, 2018

This post was contributed to VentureApp by Kody Myers, business analyst at Paro, an exclusive network of highly vetted on-demand financial professionals.

The word “model” is often tossed around the business world, evoking complicated and intimidating visual images to those unfamiliar with them. But instead of depending on your “friend with an MBA” to back you up, any business owner can and should know the basics of financial modeling. So what is a financial model exactly?

A model is a means of predicting the future, and like a meteorologist forecasting rain, a financial model is really just a volatile “best guess” that should be updated frequently. Models take a set of assumptions (and sometimes your business’s performance history) and forecast a future state. Even though they are predictions, models provide a good benchmark and can help run “what-if” scenarios so you are prepared for any situation.

To start, a model doesn’t have to be exceedingly complicated and can easily be created in a program like Excel. We’ve outlined the foundation of a basic model below as well as tips for maintaining it. We’ve also attached a template to help you get started.


4 tabs that should be in your model:


A company’s P&L statement (synonymous with an income statement) tracks your revenues and expenses to determine your net income (also known as your bottom line). If you have historical financial statements, it’s wise to make sure your model matches those. If not, stick to the standard layout of a P&L as the output. The most basic layout should follow this format:

Total Revenue $100,000
(Less: Cost of Goods Sold) $20,000
Gross Profit $80,000
(Less: Total SG&A Expenses) $65,000
Net Income $15,000



Often times, in smaller businesses with simple accounting, the net income from the P&L will be the same as the increase or decrease in cash for that period. However, a cash flow statement adds the element of projecting financing activities like business loans or capital raises. As financing activities do not hit your P&L (since they aren’t considered income), the cash flow statement is crucial to project potential future cash needs, burn rate, and runway.

Cash received from sales $100,000
Less: cash expenses $20,000
Net Operating Cash (cash burn) $80,000
Beginning Cash Balance $200,000
+/- Net Operating Cash $80,000
Plus: cash received from financing activities $50,000
Ending Cash Balance $330,000



Typically the largest expense for any company is human capital. You need a place where you can accurately project out salaries, benefits, taxes, and raises. You also need to consider potential future employees as your business grows. Remember to include a start date to forecast when a new employee’s salary will be a realized expense on your P&L.


Often, people build assumptions into formulas or scatter them throughout a model. While convenient at the time, this can be confusing in the future when you are deciding which levers you can pull to test different scenarios. Having a dedicated assumptions tab keeps things organized and makes handing off the model to someone else easier, too.


Think carefully through your assumptions

  • It is nearly impossible to accurately project future revenue, however, projecting costs is a different story
  • To make a successful model you should rely on building out costs and the logic behind those costs (i.e what will cause them to increase or decrease)
  • If you have solid logic behind how your costs grow in different sales scenarios, you can start to back into reasonable revenue projections

Nothing should be hardcoded

  • The key to a useful model is one that can function as an interactive tool to play out a variety of “what if” scenarios and accurately adjust to changes in assumptions
  • It takes a LOT of time to update hard-coded values if you want to test different scenarios such as faster growth in the first quarter of the year
  • You’ll forget what to change! If your assumptions are not driven by some cost logic, you will likely forget what needs to be updated if you were to change a revenue growth scenario

Keep things organized

  • Keeping your model organized is essential to making it a useful tool
  • Even the most basic models will have enough assumptions, data points, tabs, and unique outputs making it difficult to remember where everything is and how everything works
  • Consistent formatting and building out tabs that have a clear purpose will help you when you need to come back to your model to test a new hypothesis

It’s our hope that you now have a better understanding of what a model should include. Whether you are the CEO of a Fortune 100 company or an entrepreneur working out of your garage, build a sound financial model so that you aren’t making decisions in the blind.

As a final tip, be cognizant of your time and core competencies. If Excel isn’t your forte, consider finding someone to help you. What might cause you many nights of hair pulling frustration, would be a cinch to an experienced financial analyst and only take a few hours to build.

Editor’s note: the experts at Paro created an Excel model template that could be really useful for many businesses. You can download it here.

Read the original article by Kody Myers here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

Ho Chi Minh City
Bitexco Financial Tower, 46th Floor
2 Hai Trieu St., Ben Nghe, District 1
Ho Chi Minh City, Vietnam

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2018 500 Startups Vietnam

Most Popular

November 09, 2020

October/November 2020 Newsletter

September 07, 2020

August/September 2020 Newsletter


December 2020 Newsletter

Dear all, After 89 days without community transmission of the coronavirus, in late November, Vietnam had 3 local infections. The government responded swiftly, including contact tracing, limited ...

October/November 2020 Newsletter

Dear all, Over the last couple of months, we have found ourselves amid extraordinary scenes. Vietnam’s economic growth accelerated in the third quarter, retaining its status as one of the few pl...

August/September 2020 Newsletter

Dear all, Earlier in July, Vietnam was lauded in the coronavirus fight and reported zero deaths thanks to its drastic early actions. On July 25, a new wave of outbreak shattered the calm as Viet...

July 2020 Newsletter

Dear all, Vietnam continues on its economic recovery. Last week, the IMF published an analysis of how Vietnam's success in containing COVID-19 offers a roadmap for other developing countries. Th...
en_USEnglish viTiếng Việt