by Will Little and Troy Henikoff
In the previous post of this series, we described what financial modeling is and why it is important for startup founders to build their own models from scratch. Today, we’ll begin by diving into how to practically start building a financial model.
Good financial models are built from the bottom up. They have assumptions that flow into backup sheets that flow into monthly statements that flow into annual summaries. You literally start with the smallest component and start building up.
What is an Assumptions Tab?
The assumptions tab should be the first tab within your spreadsheet and contain variables that will be referenced from other tabs. Rather than manually entering data into your income statement, you’ll roll up variables across your assumption and detail tabs. The ONLY place you should ever type a number is into an assumption cell. Every other cell is a calculation based on the assumptions!
The types of assumptions you’ll want to define are unique for your business type. Most commonly they are related to expected revenue from each product/service you sell, expected costs, initial investment dollars in the bank, etc…