Financial models are a key tool for driving business growth and often determine the difference between a company that scales and one that is forgotten. 



At their core, financial models are frameworks that capture management’s assumptions about anticipated revenue, expenses, and, ultimately, cash runway. Leaders in any company, of any size, benefit from understanding how their business operates. A good financial model describes the economics of a business strategy in detail, highlighting what will need to happen now and in the future for the business to succeed. It is not unlike a map.

Strengthen Your Decision-Making With a Financial Model

Remember, financial models don’t make decisions— people do. Financial models are 
 tools that leaders use to gather useful data, enhance decision-making, and guide their businesses forward. Here are four key areas where having a financial model can improve decision-making:

Identifying Resource Requirements 
 for Achieving Milestones

For a business to grow, early-stage leaders must determine the resources needed to achieve key milestones. Teams need to be able to test and update underlying assumptions about their product and the market, and it’s essential that leaders have a way to measure the company’s performance and ability to execute. A sound financial model unlocks valuable data and insight in these areas that may not be immediately obvious.

Understanding Cash Runway

Every founder needs to understand the push and pull of cash burn rate with operational costs, and how this ultimately impacts revenue and milestone achievements. A financial model is an efficient way to track the variables likely to extend or shorten cash runway.

For venture-backed startups, cash runway must be long enough to meet critical milestones. Let’s use the common SaaS example of Annual Recurring Revenue (ARR). Given product development, GTM buildout, and funding, what is needed from Engineering? Marketing? Sales? We know we have limited resources, and this is where financial modeling becomes extremely helpful for founders.

If we don’t prioritize correctly, we will run out of cash faster than anticipated. Cash runway is a forcing function on discipline and resource allocation to look at what really needs to get done and what will move the needle the most. Focus is critical when managing cash runway. There are 20 initiatives your team wants to get done, but there are only 3 to 5 initiatives we can focus on effectively.

When a financial model is in place, founders can better see how resources are allocated, understand the components that impact the company’s cash runway, 
 and keep their teams focused on the highest-value work.

Developing Meaningful Metrics

Founders face an overwhelming number of metrics to consider as they build their companies. When Attivo works with founders and their boards, we evaluate and select metrics and measurements to build a financial model that makes the most sense given the company’s stage, sector, product, market realities, and milestones. With a financial model in place, founders can make more informed decisions about the metrics they will use to measure their company’s success – and use those metrics to determine the tactical steps needed to achieve key milestones.

A few common meaningful metrics for SaaS companies are Annual Recurring Revenue (ARR), Net Revenue Retention, and Churn. If ARR is an essential metric for a financial model, early-stage leadership teams need to understand how each team will contribute to achieving the milestones associated with that metric.

A key reason for building a financial model is so that teams can evaluate what it takes to achieve key milestones, set meaningful metrics associated with those milestones, and then determine the related tasks needed to reach the desired results. This helps founders, early-stage leadership teams, and their boards understand the resources and timing needed to effectively grow the business.

Measuring performance against targets

Companies use financial models to measure their ability to execute against their goals and objectives. This means leadership teams should measure actual results against their financial model.

Doing so helps confirm that the business is on track for achieving key milestones and that underlying business assumptions are accurate. If it becomes clear that the assumptions and objectives are not likely to be met, then the business must reassess objectives and assumptions and update the financial plan.

By measuring actual performance against the financial model, the company moves down a path of continuous learning about itself and the market.