Every founder I speak with has the same reaction when I mention financial modelling: their eyes glaze over, they shift uncomfortably, and I can almost hear their internal monologue muttering "I became a founder to build products, not spreadsheets!"

Welcome to the joys of building a business.

Most likely, you’re a tech founder which means you can architect complex systems, debug intricate code, and solve hairy problems. But when asked to build a financial model, you're paralysed by a fear of the unknown.

The truth might surprise you: financial modelling doesn't need to be complicated. In fact, I've seen surprisingly simple models from successful founders. They're built on the same principle that guides good software architecture: start with what works, then iterate and improve.

The Base Camp Approach: Why Simple Wins

Think of financial modelling like planning a climbing expedition. You wouldn't attempt Everest with just a rope and some enthusiasm, but you also wouldn't carry every piece of gear ever invented up the mountain. You'd pack exactly what you need for your specific route, conditions, and skill level.

The same principle applies to your financial model. Your $3M ARR SaaS company doesn't need the same modelling complexity as a Fortune 500 enterprise. What you need is a model that serves your specific requirements:

  • Clear visibility into your cash position and runway
  • Accurate forecasting for the next 12-18 months
  • Scenario planning capabilities for decision making
  • Investor-ready projections if and when fundraising time comes

Most founders get trapped thinking they need to build the financial equivalent of a Swiss Army knife when what they need is a good pocket knife.

The Essential Gear: Your Model's Core Components

Just as every climber carries essential gear regardless of the route, every SaaS financial model needs these core components:

The Profit & Loss Statement: Your Route Map

Your P&L is like your climbing route – it shows you where you've been and where you're heading. For a SaaS business, this means tracking:

Revenue Components:

  • Separate revenue streams (subscriptions, professional services, projects)
  • Monthly Recurring Revenue (MRR) growth
  • Annual contract values
  • Churn and expansion revenue
  • Customer cohorts (split by date of acquisition)

Cost Structure:

  • Cost of Goods Sold (hosting, third-party software, customer success)
  • Sales and Marketing expenses
  • Research and Development costs
  • General and Administrative expenses

The beauty of SaaS businesses is their relative simplicity. You're not manufacturing widgets or managing complex inventory. Your revenue model is predictable (even with usage based or hybrid pricing), and your costs are predominantly fixed (i.e., payroll) or grow predictably with revenue.

Cash Flow Statement: Your Oxygen Monitor

If your P&L is your route map, your cash flow statement is your oxygen monitor – it tells you if you'll survive the climb. This is where many founders stumble, confusing profitability with cash flow.

You might be profitable on paper while running out of cash. Why? Because your customers pay you fractionally, but you pay 100% of customer acquisition costs upfront. You're investing in growth today for revenue that arrives over time.

Your cash flow model needs to account for:

  • Operating cash flow from your core business
  • Capital expenditures (usually minimal for SaaS)
  • Financing activities (debt, equity, loan repayments)

Methodology

There are two common ways to forecast cashflows: direct and indirect.

I recommend using the direct method. Furthermore, I also recommend a 13 week rolling cash flow forecast.

This recommendation is based on the following reasons:

1.     It’s simpler and requires minimal accounting expertise

2.     It shows exactly when cash is coming in and when cash is going out

3.     It gives you immediate visibility, ahead of time, as to whether you’ll have a cash flow gap

4.     It’s ideal for short term liquidity management

5.     You do not need to also forecast a balance sheet (unlike indirect)

Why is it 13 weeks? What is a rolling forecast?

13 weeks isn’t a random number. It represents the year broken into quarters. Within a quarter, you should have a complete operational cycle to track patterns in billing, payroll, tax and cash collections.

The rolling aspect means every week, you drop the past week and a new one. You also review the historical performance against what was forecast and adjust accordingly.

The issue with forecasting longer than 13 weeks is you’ll lose accuracy. It’s difficult to forecast with precision beyond one quarter.

Building Your First Model: The Beginner's Route

Step 1: Set Up Your Model Structure

Start with a simple model in Excel or Google Sheets. Create separate tabs for:

  • Assumptions & Drivers (your control panel)
  • Revenue Model
  • P&L Statement
  • Cash Flow Statement
  • Key Metrics Dashboard

Build this as a monthly model for the first 24 months, then quarterly for years 3-5 (note: if you’re early stage or scaling, then restrict the model to 2 years max). This gives you the granularity you need for near-term planning while showing long-term trajectory.

Step 2: Define Your Revenue Drivers

In B2B SaaS, everything flows from your unit economics. Start by defining these core assumptions:

Customer Acquisition Metrics:

  • Monthly new customers acquired
  • Customer Acquisition Cost (CAC) by channel
  • Sales cycle length
  • Win rates by lead source

Revenue per Customer:

  • Average Contract Value (ACV) or Monthly Recurring Revenue (MRR) per customer
  • Pricing tiers and customer distribution
  • Upsell/expansion rates over time

Customer Retention:

  • Monthly or annual churn rate by customer segment
  • Customer lifetime patterns (if any)

Step 3: Build Your Revenue Model

Create a cohort-based revenue model that tracks customers by their acquisition month. For each cohort, model:

  • Initial contract value
  • Monthly churn rate
  • Expansion revenue over time
  • Total recurring revenue contribution

This approach gives you a realistic view of how your revenue base builds over time and helps you understand the compound effect of retention and expansion.  As you become more comfortable with modelling, there are other types of cohort analysis you can do to gain insights (such as usage based cohorts).

Step 4: Model Your Cost Structure

Cost of Goods Sold:

  • Hosting and infrastructure costs
  • Third-party software and API costs
  • Customer success and support costs directly tied to serving customers

Operating Expenses:

  • Sales and marketing
  • Research and development
  • General and administrative costs
  • Personnel costs by department with realistic hiring plans

Model these costs with a mix of fixed and variable components. For example, customer success might scale with customer count, while engineering costs are more stepped based on team size. Tip: use guides published by firms such as Benchmarkit for peer comparisons.

Step 5: Create Your Hiring Plan

People are your biggest cost. Build a detailed hiring plan that includes:

  • Role-by-role hiring schedule
  • Fully-loaded costs (salary + super + benefits + equity + taxes)
  • Ramp time for new hires to become productive
  • Department-specific productivity metrics

Connect this hiring plan to your revenue drivers. For instance, how many account executives do you need to hit your sales targets? How many customer success managers per 100 customers?

Step 6: Build Key SaaS Metrics

Create a dashboard that automatically calculates:

  • Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
  • Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)
  • LTV/CAC ratio and CAC payback period
  • Net Revenue Retention and Gross Revenue Retention
  • Monthly churn rate and customer count
  • Burn rate and runway
  • Revenue per employee

These metrics should pull directly from your financial statements, ensuring consistency.

Step 7: Scenario Planning

Build at least three basic scenarios:

  • Conservative: Lower growth, higher churn, longer sales cycles
  • Base Case: Your most realistic projection
  • Optimistic: Faster growth, better unit economics, shorter sales cycles

Use data tables or scenario switches to easily toggle between these views. This helps you understand your range of outcomes and plan for different situations.

Step 8: Cash Flow and Funding Requirements

Model your 13 week cash flow carefully, accounting for:

  • Timing differences between bookings and cash collection
  • Seasonal patterns in your business
  • Working capital requirements
  • Capital expenditures (if any)

Identify when you'll need additional funding and how much runway you have under different scenarios.

Step 9: Make It Dynamic and Actionable

Your model should be a living document that helps you make decisions. Set it up so you can:

  • Quickly update actual results and see variance to plan
  • Model the impact of pricing changes or new product launches
  • Evaluate different go-to-market strategies
  • Assess the ROI of marketing investments

Pro Tips for Success:

Keep it simple initially - you can always add complexity later. Focus on getting the core unit economics right before building elaborate features.

Use consistent formulas and clear labelling. Colour-code your cells: blue for inputs, black for calculations, green for outputs.

Build in data validation to prevent errors. Use dropdown lists for key assumptions and set reasonable bounds on inputs.

Document your assumptions clearly. Include notes about data sources and logic so others (and future you) can understand the model.  It’s also critical as you will likely have multiple versions.

Remember, the goal isn't perfection - it's creating a tool that helps you understand your business and make better decisions. Start with the basics and iterate based on what you learn about your actual business performance.

Avoiding Common Pitfalls: Learning from Others' Falls

After reviewing hundreds of financial models, I've seen the same mistakes repeatedly:

Over-Engineering from Day One: Founders build models with 47 tabs, dropdown menus, and fancy charts before they have basic revenue forecasting working. Start simple.

Hockey Stick Syndrome: Every model shows explosive growth starting "next quarter." Be realistic about your growth trajectory.

Ignoring Seasonality: B2B SaaS businesses often see Q4 surges and Q1 slowdowns. Account for these patterns.

Forgetting About Churn: Models that only show customer acquisition without churn are dangerously optimistic.

Static Assumptions: Build models that let you easily change key assumptions. What if growth is 20% slower? What if churn increases?

One Model, Multiple Purposes: Internal Management vs. Fundraising

Here's something crucial that many founders miss: the core principles of good financial modelling remain exactly the same whether you're using the model for internal decision-making or presenting to potential investors.

You don't need separate models for different audiences. The underlying drivers, structure, and methodology of your model remain identical. What changes is simply the outputs you generate and how you present them.

For Internal Management: You might generate weekly cash flow reports, departmental expense tracking, or detailed scenario analyses. These outputs help you make operational decisions and manage day-to-day business needs.

For Fundraising: From the same model, you'll generate investor-focused outputs like multi-year growth projections, unit economics summaries, and sensitivity analyses. But these rely on exactly the same revenue drivers, cost assumptions, and cash flow mechanics that power your internal reports.

It is tempting to present a rosy picture for potential investors. Note that investors receive hundreds of pitch decks (and models) every year. They invest in very few. You want credibility not optimism to convince an investor.

Think of it like having one powerful engine that can drive different vehicles. The internal combustion remains the same whether you're powering a work truck for daily operations or a sports car for investor presentations.

This unified approach delivers critical advantages:

  • Consistency: Your internal planning perfectly aligns with investor presentations
  • Efficiency: One model to build, maintain, and update
  • Credibility: Investors see you're using the same rigorous approach internally
  • Accuracy: You're presenting numbers you actually use to run the business

The beauty is in the simplicity – one well-built model with consistent drivers and structure that generates whatever outputs your situation demands.

The View from the Summit: Why This Matters

Building financial models isn't about becoming a financial expert overnight. It's about gaining the visibility and control you need to make informed decisions about your business.

When you have a solid financial model:

  • You sleep better knowing your cash position
  • You make strategic decisions based on data, not gut feel
  • You present confidently to investors
  • You spot problems before they become crises
  • You can evaluate opportunities objectively

Remember, you didn't need to be a master chef to make your first meal, and you don't need to be a finance expert to build your first financial model. You just need to start with the basics and improve as you go.

The mountain looks intimidating from the bottom, but every successful climb begins with a single step. Your financial model is the same – start simple, build confidence, and add complexity only when it serves your business needs.

Taki that first step. It’s not as daunting as you think.

Ready to build your first financial model but want guidance on the route? I help B2B SaaS founders create financial models that drive growth decisions. Let's connect and discuss how financial planning can accelerate your startup's success.

Shortcut: download my free B2B SaaS financial model. It’s on the Resources page. The model is designed specifically for non-financial folk!

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