If you are going to raise money from investors or other sources, you will need a financial model to help you determine the fundraising needs of your business.
A financial model answers the key questions like How much money do you need. When do you need it? How much equity should you give up in exchange for this capital?
A well-built financial model will answer these questions efficiently. Below are 5 steps to create a financial model for your upcoming fundraising needs.
Determine Your LTC to CAC Ratio
The LTV to CAC ratio is the percentage of lifetime customer value, or the revenue earned per customer, relative to the cost of acquisition. There are many factors that go into determining this ratio, and finding the appropriate range can be difficult.
That being said, it’s important not only for fundraising purposes but also for day-to-day operations, as you will want your LTC/CAC ratio to be as high as possible. If you want to do fundraise modeling, you will have to first understand how much money is required to keep the business running.
Estimate Monthly S&M investment
Having enough cash flow can be a challenge, but it’s worth trying to build up as much of an emergency fund as possible. This will help cover sudden expenses and let you take advantage of opportunities that may arise.
Experts recommend having at least three months’ worth of your salary in the bank or other safe places where you can withdraw funds in an emergency. Try saving 10% of each paycheck. So, if you make $2,000 per month, try putting $200 per paycheck into savings immediately.
Estimate Gross Margin Percentage Over the Next Two Years
If you don’t know what your gross margin percentage is over the next two years, this is the key piece of information that you need in order to calculate fundraising needs. Start by listing out all of the expenses and revenue streams expected in each of these years and then dividing by total sales.
This will be the percentage that you’re making on average per sale. The higher your margin percentage, the less you’ll need to raise. Some common gross margins are:
- retail – 40-50%
- wholesale – 25-30%
- service – 35%
Project Operating Expenses
Typically, when you are in the initial planning stages of an organization, it is best to only include expenditures that will be necessary for the first few years of operation. Project operating expenses should reflect what you think the yearly operating costs will be during the first three years of operation.
Employees who provide service day-to-day and make decisions regarding the operation of the organization should get paid well. It is important that they feel valued and receive benefits such as health insurance and retirement.
You may find the fundraising financial model overwhelming and complex, but this is not the case. It is fairly straightforward and easy to execute. So, stay confident and determine what you need to raise in the first place.