What do we mean by this?
A model answers four questions:
What will we earn?
What will we spend?
How long will our cash last?
What happens if things go better, or worse?
You don’t need complexity. You need clarity.
Golden rule
A model is only useful if it’s simple enough to update, realistic enough to trust, and connected to real business drivers.
What to actually do
Define your revenue engine: price × volume × frequency × churn × conversion.
Map your cost structure:
Fixed: rent, salaries, software
Variable: COGS, logistics, commissions
Add hiring, assets, subscriptions: Include timing, not just total cost.
Build 36 months of monthly projections: profit & loss, Cash flow, Balance sheet summary.
Add three scenarios: Base, Upside, Downside.
Review & update: monthly for startups, quarterly for stable businesses.
Common examples
Subscription business → churn and customer-acquisition cost determine survival.
Service business → capacity per employee decides revenue.
Retail → inventory cycles and cost of goods drive cash flow.
Project-based business → milestone billing and cash collection timing matter most.
Mistakes founders often make
Unrealistic growth with no drivers.
Ignoring cash flow and focusing only on profit.
No link between assumptions and numbers.
A model too complex to use.
A model without scenarios.
Bottom line: A financial model is a clarity tool. It tells you when to hire, when to slow down, when you’ll run out of cash, and what happens if the market shifts. It’s your financial GPS.