Characteristics of a Good Financial Model

The purpose of the financial model is not to predict the future with great accuracy but rather to understand the business and how it works.

Here are some characteristics of a good financial model:

The model shows what drives the business, such as leads generated, products launched, or sales reps on the team.

The customer acquisition and retention model is defined so it’s clear what must be done to reach a sales target or performance metric.

The financial model shows what actions must be taken by the team such as website traffic and conversion rates, sales closure rates, and more.  

The model has clear logic to it so investors can follow it easily.

It should be flexible and allow for changes in assumptions.

It should be accurate, which means you applied a bottoms-up approach and not a top-down.

It contains instructions on how to read it if it’s not readily apparent.

It should be visually appealing with a clean design that exudes professionalism.

Finally, it should be printable so that it comes out neatly on a page.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.