Why is it important to spend time developing a well-thought-out financial model?

I dropped by a client's office last week to check in on him and see how the company was progressing. The founders and I built a detailed financial model for their company late last year. Early this year they were successful in raising a series A round of $5M.

He had told me earlier that the potential investors were impressed with the model, but last week he told me how key that model was in the process. He said, "Did I tell you that the model got us an extra million dollars?" I didn't recall him telling me this, so I asked him to explain. He said that he had received a couple of term sheets for $4M in funding. He really wanted $5M, so he pulled the model out and said, "We really need $5M, and here's why." He took them through the model and explained in great detail what expenditures were needed to get them to the next major milestone. They ended up getting the $5M!

That is a great example of the benefit of taking the time to build out a realistic, detailed, well-thought-out financial model. My client took financial modeling seriously...because he took his company seriously. After I built the basic structure of the model, we spent several sessions where we populated it with assumptions and refined it. We attacked the assumptions from different angles and finally arrived at a model they thought was aggressive, realistic and defend-able.

When you've done a deep dive with a financial model, you understand where the inflection points are, where the trade-offs are, what the key metrics are. You have a tangible set of expectations as the company moves forward. Most importantly, all of this knowledge comes across to your investors as a much deeper understanding of the business and how to execute the next phase.

By the way, he also said that he's nailed the model so far (from an expense standpoint), and that has given him loads of credibility with his investors. In the board meetings, they're not worried at all about cash, because the company is executing per the plan. This allows the meetings to focus on other important issues.

What was that extra $1M in funding worth? That's hard to quantify, but I'm sure my client would tell you that it was definitely worth the cost of the model!

Cheers,
B