Whether you’re a founder or an early-stage finance lead, you’ll probably reach a point where you’ll want — or need — to build a forecast model. Maybe it’s because you’re fundraising and investors are asking for projections. After funding, your investors and board will likely ask what your intentions are for their invested cash. You might have partners or vendors who want to understand your business’s viability through projections. Or, perhaps, you just feel like you’re running blind without some way to see how today’s decisions impact the future state of your business, especially in relation to cash burn. A forecast model can help you align on clear business goals and understand why those goals matter.
What is a forecast model?
A forecast model is a structured approach to understanding your company’s possible future financial performance based on various assumptions and business drivers. It’s more than just a spreadsheet; it’s a dynamic tool that pieces together every aspect of your business — how you acquire and retain customers, generate revenue, allocate resources, and manage cash flow. It helps you understand the full scope of your company, ensuring that decisions are made with the broader business context in mind.
A good forecast model should start with breaking down how you win new customers, retain them, drive revenue from them, support them, build new products, resources needed to run the business, all the way through to what your cash flows and runway look like. Additionally for the finance lead, you’ll also want to understand what all of this means for your financial statements.
Why is a forecast model important?
When you’re busy building your product, figuring out product-market fit, and dealing with hiring decisions, a forecast model — especially at an early stage — can seem like a waste of time. After all, things change quickly, and it can feel counterproductive to invest too much time into a bunch of forward-looking projections. But while it might not feel like a top priority, a forecast model can be an extremely clarifying tool when done right. Here are a few of the ways it can benefit your business:
It enables better cash management
One of the primary benefits of a forecast model is its ability to help you manage your finances effectively, particularly in terms of cash flow and runway. A forecast model allows you to project your income and expenses over time, giving you a clear picture of your cash flow. This projection helps you identify potential cash shortfalls well in advance, enabling you to take proactive measures to address them.
By regularly updating your forecast with actual data, you can also keep track of how your runway is evolving and make informed decisions about when to raise additional funding or cut costs to extend your operational timeline. This is especially crucial if your startup is still in its earlier stages, since this is the time when cash burn rates can fluctuate significantly as you scale your operations.
It’s a useful resource for stakeholders and vendors
A well-prepared forecast model isn't just for internal use — it's also a great way to communicate with investors, board members, and other stakeholders. It shows that you’ve got a clear, data-driven plan for growth, which can boost investor confidence and keep your board updated on how you're tracking against your goals. Plus, it helps you prove your business's viability to partners and vendors, building trust and strong relationships. By giving everyone a transparent look at your company's future, a forecast model helps align everyone with your strategic objectives and supports your startup's success.
It helps with prioritization
Oftentimes in startups, you’ll be making a series of decisions at the micro-level without understanding what the downstream or tangential impacts are. You may decide to invest more in marketing because early tests are working well, hire AEs because your pipeline is building up, hire more engineers to build out your product roadmap sooner, or purchase software that’ll make your operations more scalable. All of these decisions may be the right call when made in isolation but it’s easy to miss how they compound when you have limited cash and resources to deploy. This can leave you short-changed for things that may have been higher priority investment areas, so a forecast model can help you think about your investments in the larger context of your whole business, ensuring smarter decisions for long-term success.
It helps you establish important baselines
A well-built forecast model helps you think about the key drivers of your business and the metrics you need to move in order to achieve the outcomes you want. It gives you a much clearer sense for what “good” looks like, and what goals you should be targeting. For example, if you’re operating in a novel software space, having a sense for what a good retention rate looks like might be tough without readily available benchmarks. But looking at how customer churn rates impact your revenue growth can provide clarity of how good they need to be for you to drive growth of certain levels.
What should you consider when building your financial model?
To make sure that you’re building out your financial model with all of the right things in mind, it’s important to consider a few key pointers:
Make sure you understand the drivers of your business
A good forecast model is grounded in a deep understanding of what drives your business. This means knowing how you acquire new customers, retain them, and generate revenue. It’s not just about crunching numbers — it’s about understanding the underlying realities those numbers represent.
Remember that the right level of granularity matters
Striking the right balance in the level of detail is crucial. Too much granularity, especially in the early stages, can be a waste of time as your business may change rapidly. However, as you grow, you’ll need to segment and cohort your forecasts to capture important trends that could impact your scalability.
Consider strategic vs. technical accuracy
While it’s important for your forecast to be technically accurate, it’s even more crucial that it helps you answer key strategic questions. A model that’s technically correct but fails to provide strategic insights is of little use.
Do some scenario planning
Forecasting is an exercise of contemplating the multiverse of possible paths forward and results (think Dr. Strange in Infinity Wars). You want to contemplate the range of possible outcomes versus thinking of forecasting as having a single path for the future or trying to predict a single outcome. By considering a range of scenarios, you’ll be better prepared to navigate uncertainties and make informed decisions.
Here are a two examples that illustrate how having different scenarios can play different roles, depending on the situation:
- For fundraising, you may want to show a forecast that illustrates how you think about attacking your market and winning. The goal isn’t to simply show very large numbers, but to also show how you think about getting there from where you are today, regardless if you’re starting at pre-revenue or at $100M looking to hit your next milestone.
- For operating, you’ll want a more conservative set of numbers so that if your top-line revenue estimates don’t pan out exactly as planned, you’re not over-committed on headcount or expenses. You should regularly assess your confidence level for certain outcomes and make sure you’re appropriately investing in the right areas that’ll be most impactful for your business and increase that confidence level.
Mistakes to avoid when building your financial model
Just as there are important things to keep in mind that can guide your financial modeling, there are also a few mistakes you should be careful to watch out for. Here are a few of the don’ts to go along with the do’s:
Treating it like a spreadsheet exercise
A forecast model is more than just a collection of numbers in a spreadsheet. Each figure should reflect a real-life decision or operational factor. For example, the line item for R&D isn’t just about how much you’re spending on research and development; it’s about understanding whether you’re thoughtfully scaling up the engineering organization over time and allocating resources across product and other areas appropriately.
Predicting the future instead of setting goals
Your forecast should be a tool for setting and tracking goals, not a crystal ball for predicting the future. For example, rather than trying to guess your revenue in six months, use your forecast to set customer acquisition and retention targets that will help you achieve your desired revenue outcome.
Relying too much on “modeling math”
While mathematical models can be useful, they should not replace common sense. When forecasting expenses, for example, don’t just rely on percentage-based models, particularly at the early stage; think about what drives those expenses and how they align with your strategic priorities. This involves understanding who are the vendors used, why you use them, and how those costs scale. Assumptions like rolling averages and such certainly have a place in the model but be thoughtful about what the real-life implication of these types of assumptions may be.
Overcomplicating early models
In the early stages, avoid getting bogged down in unnecessary complexity. Focus on the big picture and build out more detailed models as your business grows.
Missing the strategic lens
A technically correct model that doesn’t help you answer key strategic questions is not impactful. Always ensure that your forecast is aligned with your broader business strategy.
[TEMPLATE] Building your model and tips to consider
Every business is different, which inherently means that every forecast model will look different. There are a few high-level categories within the model that will be relevant regardless of industry (e.g., customers, revenue, expenses), but the way those are broken out — as well as what additional information goes into the forecast — will vary company by company.
To help get you going, we’ve built a starter forecast model that you can leverage as a template.
While a decent portion of the model is designed to be business-agnostic, it’s designed to serve as an example of a fully functioning forecast model for a fictional software company. The idea is to use this as a foundation or set of building blocks for what your own company’s model will look like — you just have to make it your own.
Below, we outline a few of the core forecast model components that you’ll see in our template — we break down what they are, as well as how to update each element in the context of our provided template. The reference numbers in each section heading correspond with column B in the provided forecast model template for easy navigation. Keep in mind that in an effort to balance simplicity with usefulness, we’ve kept this list to the basics. There are plenty of other forecast components we haven't included, but you can always update to suit your needs. If you're a founder, the level of complexity in this model will probably feel stretchy already. If you're a finance lead, I'm sure you see lots of missing areas to include or expand upon.
Lastly before we jump into the forecast model, a note: forecast models don’t exist in a vacuum and should bridge both actual results and projections. This means that many of your model assumptions will depend on having solid actual numbers across both growth, customer, and financial data. Building the forecast model can also help you understand where data gaps exist today for your business. Work with your team and accountant if you have one to collaborate on the right data infrastructure to support this effort.
Here are the key sections and inputs you’ll see in this model. First, save a copy of the template, make sure you’re mindful of the access settings (or download as an Excel spreadsheet), and you should be good to edit and make your own.
Key metrics summary (Ref 3)
It’s always helpful to have a quick snapshot summary of your forecast up top so you can easily monitor how assumption changes drive different outcomes. When sharing your forecast with your investors, board, or internally, think about the right level of detail to surface. What’s shown in the template is meant to be illustrative; something that you can build upon for the most important metrics in your business.
New customers (Ref 4)
Think about how you’re acquiring new customers and what channels make sense for your target market. Channel mix and performance will look different if you’re selling to consumers vs. small businesses vs. enterprises. It will also look different based on the nature of your products. Keep assessing what’s working vs. not and test new channels and methods that make sense for your target customers. Customer acquisition costs typically get more expensive with scale and as competition increases so think through how you expect channels to scale and don’t depend on early data to always hold true. Also think about what you consider an “acquired customer.” If you have a lot of customer signups that don’t translate into active users, you probably want to measure “acquired customer” differently than a user account creation.
Using the template: The template shows a very simple way you can break down your new customer acquisition channels and what drives them:
- Performance marketing (Ref 5) (e.g. social media ads) where there’s strong ability to track direct results (versus brand marketing where it’s much more difficult to track the return on spend) is typically thought of in terms of spend, customer acquisition cost (CAC), and new customers (before you head into much more complex territory here). The marketing spend buckets can be populated down in the Expenses section (Ref 10). Then input a CAC to calculate the forecasted number of new customers from performance marketing. CAC may be volatile in the early periods and will also depend on your product, target market, seasonality, advertising creatives/copy, and competition. If available, benchmarks can be helpful here. Play around with different levels of CAC to better understand what level of spend efficiency is needed to meet your growth goals.
- Sales (Ref 6) may be a bigger growth channel if your product is selling to larger businesses. The sales funnel can be built out in much greater detail but ultimately is driven by productivity of your sales organization and how many customers they win. The Sales AE Headcount will auto-populate based on the employees/future hires who are tagged to the Sales team in the “People” tab of this template. From there, you’ll want to input what you think the productivity (deals won per Sales person) could be over time, taking into account what sales cycles may look like for your market and ramp periods.
- Organic (Ref 7) is notoriously difficult to forecast and attribution can become misleading even with the best tools and complicated frameworks. Some businesses see a relatively stable base of organic activity while others see very seasonal or volatile trends. Use your judgment here for what makes sense but err on the conservative side — just because you plan to spend a lot on brand marketing, that doesn’t mean you’ll see an immediate return. The impact of those dollars may take a long time to be realized, if at all. (This isn’t to diminish the value of brand marketing — the function is hugely important for a number of reasons, even if the ROI isn’t always super clear cut from a numbers perspective.) The template is set up as a hardcode but could be changed to assume some correlation to total marketing spend or as a percentage of total new customers as possible options. Make sure you do backtest whether the assumption methodology holds true though as you gain more data with subsequent periods of actual data.
You may have other channels not reflected here (e.g. partnerships, affiliates) but can probably use similar simple logic to start.
Customer retention (Ref 8)
Acquiring new customers doesn’t matter if you lose them quickly and don’t build a longer-lasting relationship with them. Take time to understand how your customers stick with your company over time and test various definitions of retention that provide an accurate measure of customer relationship. If you’re a monthly subscription business, this may just be whether the customer paid or not in a given period. If your business model is volume-driven, maybe the definition should be based on a certain activity (repeat purchases, for example). A popular, simple way you’ll see to model out retention and churn is to apply a simple monthly churn metric for the entire customer base, but this doesn’t factor in any real understanding of individual customer cohorts, their behaviors, and how they trend over time. Depending on the size of each cohort, improving/declining quality, and survivorship bias for that product, a monthly churn rate can drastically misrepresent what’s happening at a deeper level. Retention rates can also be very clarifying on whether you truly have product-market fit, whether you’re acquiring the right type of customer through your acquisition channels, and other product strategy questions.
Using the template: The template provides a simple way to use an assumed cohort retention curve (Ref 9) to model out how the cohort behavior translates to overall customer growth.
- The cohorts here are established based on the month customers were acquired. A different cohort definition may make sense for your business (e.g. first time taking a specific action). Before jumping into this forecast, do the data work to determine what the right measure of retention is for your business.
- As you input actual data (blue font in Ref 10) over time, the retention rates will auto-calculate down below (Reg 11).
- For non-actual periods for a given cohort, based on how many months it’s been since the cohort start, the formulas will apply the month-over-month change rate for a given cohort month to the prior month’s retention rate. This survival rate is used rather than pulling in the retention rate directly from the assumed curve (Ref 9) to account for variability in each cohort’s behavior to avoid unrealistic changes in their curves. For future cohorts, the retention rates will be exactly the same as the assumed curve.
Revenue (Ref 12)
Think about what type of customer activity is the direct driver of revenue and make sure you’re capturing trends there appropriately. In a B2B software business, it might be as simple as the customer agreeing to pay a certain price over a certain period of time. In other businesses, it may be tied to specific customer actions or activity. Really spend time understanding customer behavior and trends you see there. Talk to your customers to better understand why they behave the way they do.
Using the template: The template treats this very simply based on simple averages, which may work fine in the earlier stages of a business if average revenue per user (ARPU) is fixed or relatively stable.
- For subscription revenue (Ref 13), input the assumed average monthly price across your subscriber base. If your company is further along, you’ll likely want to further cohort and segment this portion of your model to account for things like price increases over time, shifts in customer profiles, etc.
- For activity-driven revenue (Ref 14), input the assumed average activity volume and the average take rate if applicable for your product. Similarly, this will likely require further cohorting and segmenting with scale.
Expenses (Ref 15)
A traditional income statement (known also as a P&L statement, for “profit and losses”) breaks down expenses in terms of: cost of goods sold (COGS), research and development (R&D), general and administrative expenses (G&A), and sales and marketing (S&M). Those groupings are helpful and should be part of how you understand your business, but it may be preferable to break out expenses in a way that you can very tangibly understand what exactly you’re spending money on (e.g. salaries, professional services, software, hosting, etc.). The simple way to think about forecasting expenses is to think about your own personal finances and how you manage a budget. Table out what you plan to spend across different expense categories, who exactly you’re paying, how contracts with existing vendors work, and what money you’re setting aside for future spending needs.
Oftentimes folks will model these out using “modeling math,” like using “% of revenue” methods, for example. This makes sense when you’re analyzing companies and don’t have the actual control to influence the decisions. But in this situation, you do control the decisions, so set budgets that reflect your strategic priorities and hold your teams accountable to them. A lot changes in a startup even over the course of a quarter, but by having a clear number to start, you’ll understand how changes over time keep you on (or take you off) course, particularly in regards to cash burn. This can help you make the right trade-off decisions.
An important thing to keep in mind when it comes to expenses is that, for most startups, people-related expenses will be your largest area of spend — and this will need to factor into your forecast as well. Getting this wrong can lead to difficult spirals of layoffs, negative press, low employee morale, etc. From the early days, develop the muscle of prioritizing hires over the next few months and regularly assessing with your team where the needs are and why. Formalize these into hiring plans with market-informed assumptions on compensation so you’re not surprised by how quickly people related expenses build up.
Using the template: The template breaks out in the Expenses section a simple way to build out your budgets for each of the expense categories. If you have unique expenses not captured here, spend time thinking about which of your expenses are inputs vs. outputs. Inputs are the ones you have control over spending (e.g. marketing spend) whereas outputs are the ones that are the result of another item (e.g. payroll taxes driven by headcount and salaries paid).
- COGS (Ref 16) are typically considered an output given these are the variable costs associated with delivering your product and service and, hence, scale with customers and revenue. Input what the cost per customer is expected to be based on historical actuals or product decisions to populate this expense line.
- For software companies, hosting services may be the main cost here. For an ecommerce company, inventory will likely be the main cost. For services, the cost of the team delivering the service.
- Note that in a traditional GAAP income statement, personnel expenses related to customer support is typically included in COGS. This income statement is meant more for internal operating purposes vs. external reporting where GAAP treatment of financials can be more important depending on the audience.
- Understanding COGS is important to understand your business’s gross margins, and the first step in assessing scalability over time. High margins can mean more cash flow to help fund additional hiring or growth investments, while low margins mean you’ll need to focus on driving high volume to build a scalable business. (This isn’t necessarily a bad thing — it may be the nature of the industry you play in.)
- Marketing spend (Ref 17) can be inputted based on the investment decisions you’ve made. Remember, you typically have control over what you spend so build a marketing plan that thoughtfully considers the best way to allocate spend here. The performance marketing budget will drive new customer acquisition as mentioned above. Brand Marketing and Events & Conferences do not impact new customers and growth as modeled here — you may find that for your business there is a more defensible connection, and these should in fact be treated as drivers.
- Personnel expenses (Ref 18) can be easily managed by using the “People” tab of the template as a headcount plan template you can use. Once filled in, the information will auto-populate the expense sections of the model accordingly so you can better tie the real-life hiring decisions to the financial implications.
- The “People” tab will auto-populate the Salaries portion of the forecast model based on the Salary and Start Date information. The Start Month will auto-populate based on the Start Date and capture those roles in the Salaries portion. The headcount number in the Key Metrics Summary will also update based on the inputs here.
- If an employee is terminated, keep them in the list and enter the Termination Date. This will auto-populate the Termination Month and subtract the terminated role's salary from the Salaries portion of the model if upcoming.
- If your company has a sales motion, headcount noted as "Sales" in the Team column of the “People” tab will auto-populate the Sales AE Headcount row. (Note that the tag in the Team column will need to match this exactly, or you’ll need to update the related formula in the model to reflect the corresponding tag you wish to use for sales headcount in the “People” tab.)
- Remember, the roles in the template are made up roles populated for the sake of exhibiting how the forecast model works. This is not intended to be a recommendation on compensation levels, scaling, or sequencing of hires.
- Payroll tax, benefits, travel & meals expenses are outputs based on hiring and salaries. Input their assumptions to populate these expenses.
- Non-personnel expenses (Ref 19) can be a mix of inputs and outputs. Rent & office expenses are usually fixed based on a lease schedule, whereas professional services have a level of discretion to them like marketing spend. Software expenses can grow large if not monitored and, depending on your vendors, can scale directly with employees or indirectly with customers or other operations (for example, if you need to pay more for additional seats with particular tools).
Financial statements (Ref 20, 25, 28)
If you’re a founder this might feel intimidating, but it doesn’t have to be. Understand how the various items roll up into your P&L and how your balance sheet items and cash balance change over time. As an early-stage company, you may still be performing cash accounting and not GAAP accounting (aka accrual-based accounting) and hence won’t have many balance sheet items. When you bring on an outsourced accountant, part-time CFO, or your first finance hire, make the investment to make the switch as a better way to understand the truths of your business. If you’re a founder, there may be balance sheet concepts that are new (e.g. net working capital) that may be valuable to manage your business and cash runway that may not be appreciated when only looking at your P&L. Tracking how your cash balance trends month over month in the forecasted period is really the best way to understand your cash runway. (Simply dividing your cash balance by last month’s change in cash balance or EBITDA doesn’t reflect how you expect your business to change over time.)
Using the template: The template provides a forecast for all three key financial statements (income statement, balance sheet, and cash flow statement). The financial statements are mostly automated and really a result of the work you did for the above sections but there are items that’ll need some ancillary assumptions to work. That said, you should still take time to really understand your company’s financial statement. They’ll ultimately be the measuring stick for how your business is doing beyond the early phases, cutting through the hype of vanity metrics.
- The Income Statement (Ref 20) is a financial summary of your business’s operations from revenue and expenses, down to profitability measures including gross profit, EBITDA, and net income. Between EBITDA and net income are a few items that you may have spent less time thinking about, which may or may not be important for your business and stage.
- If you’re working with an accountant to properly capitalize fixed assets, you’ll likely have Depreciation & Amortization (Ref 21) to expense them over time. If your business is heavily capital-intensive (e.g. need to invest a lot of cash upfront for buildout of servers or buildings, for example), getting this right will be important to understand your cashflow dynamics. If you’re not working with an accountant for GAAP accounting or you’re not running a capital-intensive business, you mayyou’ll be fine ignoring this in the early days.
- Stock-based compensation is a real thing, even if non-cash and associated with giving employees equity awards. In the early days, you can ignore this, but it’s included in the template here for more mature companies that have started to record this.
- Interest expense and income are related to what you pay on any debt and yield on invested cash, respectively. Input the associated annual rates in the assumption rows (Ref 23) and these items will calculate based on the outstanding debt and treasury balances.
- Taxes, if profitable, can be calculated in the template using a simple effective tax rate assumption. Consult with a tax advisor to better understand your tax situation though as this may be too simplistic for your business. There’s a lot of complexity here around how expenses are treated for tax deduction purposes, which tax credits you may be eligible for, and the possible usage of prior net operating losses (NOLs) to offset tax liabilities.
- The Balance Sheet (Ref 25) is a breakdown of your business’s assets, liabilities, and equity. The most basic items here are cash, debt, and equity, but it will include other line items once your accounting is on a GAAP basis where timing of expense and revenue recognition may not align with the cash movement timing. If you’re still on cash accounting, you can ignore some of these balance sheet items until you’ve made the transition to GAAP.
- Working capital items (Accounts Receivable, Prepaid Expenses, Credit Cards, Accounts Payable, Accrued Expenses shown in the template) (Ref 26) can be easily forecasted based on ratios that tie those balances to the underlying activity that causes them.
- Fixed Assets (Ref 26) reflect long term assets that the company has purchased. Rather than treating these expenditures as expenses through the P&L, GAAP capitalizes them based on a capitalization policy (puts them on the balance sheet vs. income statement) and recognizes their expenses over their useful life. As noted above on Depreciation & Amortization, your business may be too early to spend meaningful time here. If you’re a finance lead, you’ll want to build a fixed asset schedule to properly forecast for these.
- Venture debt (may be other forms of debt too) (Ref 27) is populated based on the debt drawdowns (not available credit which isn’t reflected in a balance sheet) captured in the Cash Flow Statement. Equity (Ref 27) is populated based on equity proceeds captured also in the Cash Flow Statement.
- Make sure your balance sheet actually balances (Total Assets = Total Liabilities + Total Equity). If not, something is broken in the forecast model.
- If you’re not at the point of having a more detailed balance sheet per GAAP, don’t worry — you can still use this template easily. Just zero out the working capital items (Ref 26) and the Assumptions associated with them other than your credit card balance which you can track and record.
- The Cash Flow Statement (Ref 28) helps reconcile the income statement and balance sheet with their GAAP treatments down to what the ins and outs on a cash basis are.
- Cash from Operating Activities: removes the impact of working capital changes (Ref 26) and non-cash expenses (Ref 21 and 22) to measure how much cash came from your business’s core operations. This section is fully auto-populated.
- Cash from Investing Activities: the term “investing” is from the company’s perspective where capital is used for long term assets (capital expenditures or capex) and ties into the Fixed Assets and Depreciation & Amortization lines discussed above (Ref 21).
- Cash from Financing Activities: this is where you reflect cash coming into the business from debt proceeds (convertible note, venture debt, working capital line, SMB loan, etc.) and equity proceeds from investors.
- Based on the above, your change in cash and ending cash balance is calculated for the forecast periods.
As you digest this and begin putting it into practice, remember to make the template forecast model your own. Again, there are lots of derivative metrics that you can add which have been excluded in the spirit of keeping this as simple as possible. Spreadsheets are always flexible so play around with things and remember to always ground the forecast in your business and how you think about the strategic priorities for the company.
For the non-finance folks who are adventuring into the world of financial forecasts and may not be at home in spreadsheets, don’t be intimidated. Just remind yourself that spreadsheets are much easier than writing engineering code or people management which you’re probably doing as a non-finance founder.
And most importantly, remember to use the forecast model as a living, breathing management tool for your company. Update it after each month with actuals, understand how you’re performing to the forecast and why, and use it to uplevel your own command of your business.
Dan Kang, VP of finance