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What is a financial model?
A financial model is a spreadsheet that forecasts a business’s results from its assumptions: what it sells, what it costs to run and how it is funded. Change an assumption and the forecast moves with it, so you can test a decision before you make it.
Most business models are three-statement models: the profit and loss, balance sheet and cash flow, linked so that profit, cash and debt always agree. Around them sit the parts that make a model useful:
- Inputs. Every assumption on one sheet, in blue, with where it came from.
- Revenue and cost drivers. Customers, prices, staff, sites and stock, built up rather than typed in.
- The three statements. Profit and loss, balance sheet and cash flow, linked in every period.
- Scenarios. A base case and a downside, switched from one place.
- Valuation. Discounted cash flow or multiples, when the model has to put a value on the business.
- Checks and a dashboard. Proof that it balances, and the figures your reader looks for first.
How do you build a financial model, step by step?
These are the steps a professional modeller follows, in this order, because each one feeds the next. Every step is quick to describe and slow to do well.
- 1
Decide what the model is for
Write down the decision it supports and who will read it. A bank loan needs monthly cash and the repayments; a raise needs runway and unit economics; a sale needs a valuation.
- 2
Gather your numbers
Collect two or three years of accounts if you have them, current trading, prices, staff costs, leases and loans. Note where every figure came from.
- 3
Set up one inputs sheet
Put every assumption on one sheet, in blue, with its source beside it. Formulas everywhere else refer to it and never contain a typed-in number.
- 4
Build revenue from drivers
Customers × average spend, sites × sales per site, or seats × price per seat. One revenue line with a growth rate hides how the business works.
- 5
Build costs, assets and funding
Cost of sales, staff from a hiring plan, overheads, equipment and its depreciation, tax, and each loan with its interest and repayments.
- 6
Link the three statements
Profit flows into retained earnings, depreciation is added back in the cash flow, debtor and creditor days move working capital, and closing cash lands on the balance sheet.
- 7
Check it, then test it
Confirm that the balance sheet balances and cash agrees in every period, then run a downside case and move the inputs that matter most to see what breaks.
- Every input on the inputs sheet, with its source
- No numbers typed into formulas
- Profit flows into retained earnings
- Closing cash agrees to the balance sheet
- The balance sheet balances in every period
What are the most common financial model mistakes?
Most broken models fail in the same few places, and lenders, investors and reviewers look there first:
- Numbers typed into formulas. A hidden 1.1 inside a formula is an assumption nobody can see or change.
- Growth with no cost behind it. Revenue that triples while sales and marketing spending stays flat.
- Profit treated as cash. Customers pay late, stock ties up cash, and loans are repaid from cash, not profit.
- GST and BAS left out. The GST you collect goes to the ATO with your BAS, so a cash forecast without it overstates cash.
- A balance sheet forced to balance. A plug figure hides the error instead of fixing it.
- One case only. Without a downside case, nobody knows how much room the plan has.
- Too much detail too early. Ten years of monthly columns make a model slow to check; yearly is enough after the first two or three.
Template, consultant or built for you: which is right?
There are three ways to get a financial model, and each suits a different person. The honest comparison:
| Route | Excel template | Consultant | Built free by The Financial Modeller |
|---|---|---|---|
| Time to a working model | Download now, then days of your own work to fit it to your business | Often weeks, with scoping and review rounds | Usually ready within the hour |
| Cost to you | Free or a one-off fee | A professional fee, by the project or by the day | Free, with a free account |
| Your effort | High: you adapt it, fill it in and check every link | Medium: briefings, data requests and meetings | Low: describe the business, attach what you have, review the preview |
| Fit to your business | Generic: someone else’s structure | Bespoke to your brief | Built around your business from 1,500+ tested building blocks |
| Who checks it | You | The consultant, with a model audit for large deals | A Checks sheet in the workbook, and our team before it is sent |
| Best for | Learning, or a simple business you know well | Complex deals, audited models, ongoing support | Owners and founders who need a checked model fast |
Whichever route you take, have the model checked by someone you trust before you rely on it. A model is a set of calculations, not financial advice.
What is the fastest way to build a financial model?
Keep the scope to the decision in front of you, start from your latest accounts rather than a blank sheet, and model monthly only as far ahead as the decision needs. A focused model you can check beats a large one you cannot.
Faster still, have it built. Tell us about the business in a few minutes and attach what you have: accounts, a budget, a pitch deck or a spreadsheet. We assemble the model from tested building blocks, check that it balances in every period, and our team reviews it before it is sent. You preview every sheet online, ask for any changes, then download the Excel file. It is usually ready within the hour, and it is free.