Thread by @mhi

@TroyHenikoff has seen over 2,000 startup financial models (FMs) as an investor. He gave a @KelloggSchool workshop this weekend on Financial Modeling 101. Buckle up for:

10 COMMANDMENTS OF STARTUP FINANCIAL MODELS

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1. Update your FMs AT LEAST once a month; they are living documents, not a one-time activity for fundraising. They are mathematical representations of today, historical records of the past, and credible forecasts into the future.

2. Start with the objective. A FM is a progress bar, and it is useless unless you are optimizing towards SOMETHING. What are you trying to reach? More sales? More profits? More time? FMs create focus, focus delivers results.

3. Apply brutal honesty with the assumptions you are making. Be clear with your inputs to drive REVENUE as output. A good FM should only have a single tab with key assumptions. What activities that cost $ lead to metrics that make $?

4. Don’t let your optimism blind you. Growth is NOT an input; it is a result of your activities. Rookie mistake in models is assuming 10% magical growth every month. Instead, ask what will I DO more of that will lead me to 10% growth?

5. Start calling your fixed costs invariable expenses. These are costs that aren’t tied to a new sale. Reduce invariable expenses as total amount, reduce variable expenses as % of each sale.

6. Assumptions are solid when you nail unit economics, aka variable costs. How much money do you make per sale? Remember, if you need to hire someone new to manage every 10th customer, that has to be accounted for.

7. Understand your default alive marker: the number of customers you need to cover your invariable expenses. As long as you are default alive, you are in control of your destiny. (aka Ramen Profitable)

8. Connect reality to what you predicted would happen. A disciplined FM won’t let you drink your own kool aid. Dig in on issues monthly - why do we have 5% churn? Why did we get 0 new leads? Kill activities that don’t move the needle.

9. Build it yourself. Real value is understanding the levers behind your business. If you need help, learn through mentorship, not a transactional exchange. You will need to revisit your FM as your business evolves.

10. A good FM makes you FUNDABLE and PROFITABLE. Use your FM to quantify the levers of your business like a machine, and you will have a much easier time convincing others who are taking a risk in funding you.

BONUS: Follow @TroyHenikoff, @techstars and @MATH_V_P for more FM advice and timeless startup wisdom. Thank you @shl for inspiring this, and preorder @leversbook book by @iamamoslee and @trevor_boehm to learn more about their framework.