Ruth Wairimu, East Africa Portfolio Manager, Acumen 

Models help founders understand, plan and grow

Founders need to do financial modeling because:

• One, it allows them to understand the growth prospects of the business. It allows them to understand: What am I selling? How much am I selling it at? How many quantities or how much volume do I need to sell? 

• Second, it also creates a piece where they can make decisions regarding costs, how to grow the business, and scalability. 

• Third, it gives them an understanding of their capital needs: so you're able to see how much you want to grow, and to get there, this is how much you need in terms of capital investment.

• Fourth, they need to understand the pathway to profitability. It helps them understand the revenue drivers that will take me there, how you need to shape my costs to sustain your business, and how much you need to be able to get to profitability. 

All in all, it is a very useful tool for founders.

Models help investors evaluate the business and align with you

From an investor perspective:

• From an investor perspective: This is the tool that allows investors to fully understand the business and come into alignment with the founder. The founder is telling a story through the financial model: the story of revenues, growth prospects, potential market share, and how much they need to get to that point, so they are in alignment with investors.

• Investors are able to understand the cash needs and the form of capital structure the company needs, whether debt, equity, or something in between.

• It also tells the investor what kind of valuation approach makes sense: whether it requires discounted cash flows or revenue multiples, for example. This is critical information for both the founder and the investor to be on the same page.

• Lastly, for investors, it allows them to understand the risk and reward of a particular business, and overall, it speeds up the alignment between the founder and the investor.

Key takeaways

• Financial modeling helps you understand what you’re selling, at what price, and how much you need to sell to grow.

• It guides your decisions on costs, capital needs, scalability, and profitability.

• It also helps align you with investors by clearly showing your growth story, cash needs, and pathway to profitability.