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How do you make evidence-based decisions for your business by building your own crystal ball?

A step-by-step guide to your financial business model.

Learn how the net profit equation leads to a playful business.

What is your biggest concern for your business?

Chances are that you answered with a version of "Running out of money."

I have yet to see one business that doesn't worry about not getting enough money.

Either to pay bills or to fulfill shareholder expectations.

Yet business finance is discussed only superficially in the startup community.

Financial modelling is completely ignored in Germany, where I opened my first company.

This ignorance cost us around 1.5m euros in the end.

Most often, startups focus on two irrelevant measures to make decisions:

Top-down market analysis
Monthly revenue

I have not seen one startup founder yet who picked a market that was too small.

Usually, we pick too broad markets and try to compete with giant corporations.

And for monthly revenue, this number doesn't tell me if I have enough money to pay all my bills.

Is there a better way to know if my business will succeed financially?

Is there a way to predict the future of my business?

Is there a way to make solid decisions for my business every time?

Yes, it is called financial modelling.

I will tell you step-by-step how to build your own crystal ball below.

If this all sounds like too much effort, let's talk.

If you want to get to the next level but don't know where to start, I can help you.

Ready to grow your business and transform it into a playground that runs itself?

>>> Talk directly to me.

How to Build a Financial Model?

This article gives you a quick top-level introduction to startup finances.

Everything you need to know to get started tracking the health of your business fast is in there.

Today, I want to dive into financial forecasting.

I will show you how you can build your financial model and predict your company's future.

Find Your Net Profit Formula

Finding your net profit formula is the first step to building a sound financial model.

This is a formula consisting of all variables that influence your net profit.

I read several books recommending you find your revenue formula instead.

The revenue formula will give you a very limited view of your business.

It only observes the inflow side of your business.

Have you ever tried filling a bathtub without knowing if you plugged the drainage?

It's a 50/50 coin flip if the tub will be filled at any point or not.

The net profit formula observes in- and outflow.

This leads to much higher precision in your predictions.

You not only know beforehand if you plugged the drainage beforehand.

You will also know if the inflow is big enough to compensate for the holes in the plug.

The net profit formula gives you an accurate prediction of your business's health bar.

It feels like cheating using this method.

The most generic net profit formula looks like this:

Revenue - CostOfSales - OperatingCosts - NonOperatingCosts - Taxes = NetProfit

As you can see, revenue is only one small piece of your company's future.

I know this looks daunting, but it isn't as bad as you think.

This equation may already look familiar to you.

This is precisely the information your income statement will tell you.

There is a reason why successful businesses have up-to-date monthly income statements.

Each of the variables looks different for different businesses.

Cost of Sales is different if you're selling physical goods compared to digital ones.
Taxes depend on the country in which you opened your company.
Your company culture influences operating Costs.

Find All Levers Driving Your Profit

Now we know the biggest variables that move our net profit.

Which levers can we pull to influence each variable of the net profit formula?

I assume you're running a digital, 100% remote business.

This simplifies everything you do and gives you insane possibilities.

You have no offices or machines that cost a lot and depreciate over time.
You have immediate payments, which removes complicated receivable/payable calculations.

Revenue:

What is our business model?
How much money does a single customer spend?
How many customers do we have?

Cost of Sales:

Do we have expensive servers that a cheaper provider could replace?
Do we pay contractors for things that we could do ourselves?
Do we need salespeople, or can we automate this with the same results?

Operating Costs:

Which team benefits could we pay for that improve the lives of our team?
Would it make sense to get an internal legal advisor instead of searching outside?
Do our advertisement costs drive revenue enough to excuse the cost?
Do we have office spaces when everyone is working remotely?

Non-Operating Costs:

Do we have assets that cost much in upkeep or depreciate?
What losses or gains can we make through currency exchange?

Taxes:

Are there ways to reduce the tax load (legally)?
Do we run the business in the correct country?

Go with this exercise in as much detail as you like.

The deeper you go, the more chances you have of finding a lever with a significant impact.

Either way, you will deeply understand your business and all the pieces within it.

We all know:

Knowledge is power.

We made 250k EUR once by pulling one tiny lever at the right time.

And this was without increasing our revenue.

Make Decisions Based on Experiments

Now, the fun part starts.

My goal is always to build a playful business.

What better way to play with your business than having a model that predicts the future?

Let's play and see how high we can get our business's health bar.

Every variable you have in your financial model is an assumption.

We assume that X% of customers buy again.
We assume that one customer brings in X Euro over their lifetime.
We assume we need to reach X people on our social media to make Y sales.
We assume that we need to pay X% tax on our profits.

The more you back your assumptions with real data, the more reliable your prediction will be.

To get this data, you need to do experiments.

Here is how I do my experiments every week.

I pick one variable I think could significantly impact my company's health bar.
I adjust this variable to a level I think is possible.
Now, I define actions I believe will lead to this adjusted goal level.
I define a deadline until when I believe these actions will achieve the new goal.
Then, I execute the actions and measure their impact.

I will know exactly whether this lever works as I thought it would by the deadline.

If it worked out, great, I raised the bar!

If not, move on to the next lever.

There is no losing; either you win or you learn.

These experiments let you see if you're ready to scale your business.

Did you notice that I phrased all the steps as my assumptions, not as facts?

This is a crucial mindset shift when you want to turn your business into a playground.

Only if we stay curious and embrace change will we have the creativity to find the best solutions.

Make Your Fears Fun

I taught this process to one of my clients within an hour.

All their anxieties around business finances were gone.

Numbers don't need to be terrifying or boring.

We can make them fun by turning them into experiments and question games.

If done right, the financial model will tell you if you're ready to even think of scaling your business.

You can try to drive your business by looking out the back window or by turning around and looking out the front.

Which way will bring you to your goal faster?

I'm considering turning financial modelling into a video game.

A game where you explore your business, and your personal crystal ball plops out at the end as a by-product.

Would you want to play this game?

Shoot me a message on Linkedin.

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How to Make Evidence-Based Financial Decisions For Your Business