What Are the Advantages and Disadvantages of Using a Pre-Built Financial Model for Your Startup?

Introduction

Starting a new business can be an exciting and challenging endeavor. For any business to become successful, mindful planning and budgeting is essential. One of the most important factors startups should consider when it comes to financial planning is the choice of whether to use a pre-built financial model or create one from scratch. In this blog post, we'll review the advantages and disadvantages of using a pre-built financial model for your startup.

Advantages of Using a Pre-Built Financial Model

• Pre-built financial models come with built-in formulas and calculations, meaning the user does not have to start from scratch.
• The results from the model are reliable since errors are minimized with the built-in mathematical checks.
• There is typically no need for financial modeling training when using a pre-built model.

Disadvantages of Using a Pre-Built Financial Model

• The pre-built model may not contain the appropriate assumptions and variables you may need to customize your financial model.
• The model may not have the same quality or detail as a model built by a financial analyst.
• Due to the difficulty in understanding or troubleshooting a pre-built financial model, it may be difficult to diagnose and troubleshoot errors with the model.

Key Takeaways

• Pre-built financial models come with built-in formulas and calculations, meaning the user does not have to start from scratch.
• The model may not contain the appropriate assumptions and variables you may need to customize your financial model.
• Due to the difficulty in understanding or troubleshooting a pre-built financial model, it may be difficult to diagnose and troubleshoot errors with the model.

Advantages of Using a Pre-Built Financial Model

Using a pre-built financial model for a startup comes with a variety of advantages. Below, we outline the three key advantages, from increased access to a more structured approach and easier adaptability, that come with using a pre-built model for a new business.

Accessibility

One of the great advantages that comes with using a pre-built financial model for a startup is the availability of resources and information. With a pre-built model, you can easily access familiar and relevant metrics that apply to your business. For example, a predefined worksheet may give you access to industry and sector-specific ratios, making it easy to see how your company compares to others in the same industry.

Using a pre-built model also means you can reduce the time and financial commitment necessary to develop one of your own. This can significantly reduce the cost of financial modeling, while still allowing you to make informed decisions.

Structured Approach

A pre-built financial model comes with a structured approach to forecasting. This means the model follows a well-defined process that is easy to use and understand, regardless of your business’s individual financial situation. A pre-built model eliminates the need for tedious, manual calculations and helps you quickly and accurately generate financial projections.

Additionally, since a pre-built model is built on established industry standards, it is less likely to be vulnerable to errors or biased assumptions. A pre-built model also ensures that daily financial reports are prepared in a timely manner and to the same high quality.

Readily Adaptable

A pre-built financial model can also be used to forecast how your business’s financial performance would be affected by changing market conditions. This allows you to make informed decisions and test the sensitivity of your business by inputting different scenarios. You can also use the pre-built model to monitor the impact of certain financial changes or policies over time.

Overall, a pre-built financial model provides startups with an accessible solution that helps quickly and easily generate accurate financial forecasts. It offers a structured, quantifiable approach to managing finances and helps you test, monitor, and adapt your business’s financial goals in the future.

Disadvantages of Using a Pre-Built Financial Model

Using a pre-built financial model can have a few drawbacks that are important to consider before making such a decision. In particular, some of the disadvantages include:

Rigid Approach

One disadvantage of using a pre-built financial model is its rigid approach. Since the model is not tailored to the specific goals and objectives of the business, the results may not be as accurate or as useful as a custom-built financial model might be.

Limited Choice of Inputs

Another disadvantage is the limited choice of inputs. Pre-built financial models often come with a set of input parameters that cannot be customized or changed. This means that the results may not reflect the actual conditions and assumptions of the business.

Lack of Flexibility

Finally, pre-built financial models do not offer much flexibility. These models may not be able to accommodate additional changes and assumptions that could lead to more successful outcomes. Therefore, businesses need to be careful when making a decision on whether or not to use a pre-built financial model.

Guidance for Startups

Pre-built financial models can be a powerful tool for many businesses, especially startups. However, it’s important to make sure the model is up to the task, and that you make the best choice for your needs. Here are a few tips to keep in mind when considering whether or not to use a pre-built financial model.

Consider the Advantages and Disadvantages

When deciding whether or not to use a pre-built financial model, there are a few pros and cons to keep in mind. For example, using a pre-built financial model can save you time and money compared to developing your own model. However, it may also limit your flexibility and customization options. It’s important to consider both sides before making a decision.

Assess the Quality of the Models

It’s also important to make sure the financial model you’re considering is high quality. Look for models that have been tested by a third party, and make sure the model is up to date with accounting standards. Be sure to check that the model includes all of the information necessary for making your decisions. Also, consider whether or not the model can be adapted easily to fit the needs of your business and budget.

Seek Advice from Experienced Financial Modelers

Finally, it’s always a good idea to seek advice from experienced financial modelers before making a decision. Experienced professionals can help you assess the quality of the model, suggest improvements, and make sure you’re making the best decision for your needs. A little bit of help and advice can go a long way in making sure you choose the right model for your business.

Benefits of Custom Financial Modeling

Custom financial modeling can provide several advantages to startups. It allows companies to create a model that targets specific needs, and provides flexibility when modeling. It also allows startups to automate key outputs over time. Let’s take a closer look at the benefits of custom financial modeling.

Targeting Specific Needs

Creating a customized financial model specifically for your startup allows you to target any specific needs that you may have. For instance, if you are expecting to raise financing, you can prepare a tailored model with custom metrics that are attractive to potential investors. A pre-built financial model may not provide the same level of specificity that your business requires, so having a custom model can ensure you’re addressing the unique needs of your business.

Flexibility In Modeling

Custom financial models also allow for much greater flexibility in terms of modeling. If you need to make assumptions about how quickly your startup will grow or how much cash it will require, you can tailor the equations and parameters included in your model to meet these needs. With a pre-built model, these assumptions may not be available, meaning that the accuracy of any results can be compromised.

Possibility to Automate Outputs

If your startup uses a custom financial model, you can create automated outputs that will update the numbers automatically. This is useful if you need to run regular reports for shareholders or other stakeholders. You can also add automated warning triggers that will alert you or your team when certain parameters fall outside of a desired range. This can help you stay on top of your financials and potential risks on an ongoing basis.

Disadvantages of Custom Financial Modeling

Creating a custom financial model, no matter how simple or complex, can be a costly and time consuming task. Many entrepreneurs, especially those in the early-stages of their startup, often lack the time and financial resources to develop a custom financial model tailored exactly to the specifics of their business. Depending on the level of detail and complexity, it's possible that the time and money to develop a custom-tailored model can greatly exceed the advantages of using it.

Cost

Custom financial modeling is a complex and technical task. Developing a reliable model involves hiring experienced financial professionals or consultants. Business owners should already be aware of the cost of their staff’s time, paying for a custom financial model can cost a considerable amount, and the final cost may depend on the complexity of the model and the number of personnel who worked on it.

Time Intensive

Crafting a custom financial model to accurately simulate and project the future of a business or a project is a taxing process which requires up front preparatory work, testing and debugging. It's very likely a task that can take many weeks or even months to complete, depending on the complexity and scope of the project. This makes custom financial modeling an option that is too complicated, lengthy and resource intensive for some entrepreneurs.

Risk of Error

Custom financial models involve a considerable amount of manual work and may require multiple revisions and corrections. It's possible that typos and miscalculations may be overlooked, spelling disaster for the strategic objectives of the business. As such, it's important that the team conducting the modeling is extremely detail-oriented and have the relevant experience to ensure accurate results.

Conclusion

Picking the right financial model for your startup can be a daunting task. It is important to understand the advantages and disadvantages of using a pre-built financial model versus building a custom financial model. Pre-built financial models are quick to obtain and easier to use, while custom financial models can provide more accurate results and more flexibility.

It is recommended to use a pre-built financial model when time and money are of the essence. On the other hand, a custom financial model should be used when accuracy, up-to-date projections and greater flexibility are necessary. When in doubt, it is always wise to seek advice from experienced financial modelers who specialize in financial modeling for startups.