Ruth Wairimu, East Africa Portfolio Manager, Acumen 

Mistake 1: Building unrealistic forecasts 

Sometimes you find that founders will overstate their revenue growth, their market share, and their timeline to profitability. And what happens when you make this overestimation is that the financial model as a tool for planning and decision-making is rendered useless. You can't make critical decisions on hiring, on how much you should be spending, and on how much you need to scale the business. 

And when you overestimate your forecasts, more often than not, you’re setting yourself up for failure. You will likely not be able to meet your forecasts. And when you don’t meet them, a lot of external shareholders, including your funders for example, will question whether you have the execution capacity it takes, whether the market opportunity is large enough, and whether your service or product has the critical value proposition it needs to sell. So for you to set yourself up for success, you need to be realistic in your forecasts.

Mistake 2: Relying on weak or untested assumptions

When founders are beginning to build a financial model, they come up with assumptions, and those assumptions inform their revenues, costs, etc. A lot of the time, founders will come up with these assumptions based on guesswork rather than a logical flow or a credible source. And because they do this using guesswork or estimations, they can’t explain the model, or the numbers that they come up with become indefensible. So, assumptions need to be based on reality and logic to make your financial model numbers defensible and to build the most credible model.

Mistake 3: Overlooking the true cost of growth

There’s often a lot of ambition and excitement when founders are beginning to build the financial model, and they will overestimate revenue growth without considering at what cost. You need to reflect on how much it costs for you to get to the revenue you’re planning to get. How much it costs to get to profitability faster. For your numbers to be based in reality, you need to show how much it costs to get to the promised land.

Key takeaways

• Avoid overestimating your models, create a realistic and achievable forecast for your business.

• Every number in your model should be grounded in logic and real data, not guesswork.

• Always reflect the real cost of growth so your plans are ambitious but still rooted in reality.