The best way to think of a financial model is as a numbers-driven roadmap:

• It’s a simplification. It won’t (and shouldn’t) show every detail of your business, just like a map won’t show every leaf and stone.
• A model should reflect the company, not vice versa. If you found a road on a map that didn't exist, you wouldn’t start paving it. A model should never restrict your strategy and vision: it should be adapted to accurately reflect them.
• To be useful, it must be readable/accessible. It should follow certain conventions (basic accounting rules), but also should fit a cohesive narrative that resonates with stakeholders. If you propose certain milestones, benchmarks, and performance indicators, these should appear in the model within their respective timeframes.

1. It’ll help you understand the key levers of your business
This is key for swift, efficient decision-making.
For example - increasing pricing will generally lead to more revenue. But while some customers will accept higher prices, others will leave if there is a price increase. Should you price down at first to capture the market, or will that erode your future profitability?
Maybe hiring software developers will help you perfect the product, but investors will want to know if you have an effective go-to-market plan, for which you need sales personnel. Which should you prioritise, or do you have enough capital to do both?

2. It’ll help you keep track of your company’s financial achievements and health
Two key questions you’ll have to answer pretty much every day:
“Am I growing enough?” Properly recording historical volumes, revenue, and growth metrics will help establish a track record to assess your strategy and guide future initiatives.
“Do I have enough cash?” Accurately tracking costs (or “burn”) and external cash inflow will help you assess and control your runway, prioritise capital investments into strategy venues, efficiently time your fundraises and optimise your capital structure.

3. It’ll help you test and iterate on key assumptions
Unless you’re Paul the Octopus, trying to predict the future is a fool’s errand. So being aware of and preparing for different scenarios is critical to any decision-making exercise. A well-built, flexible model will allow you to quickly shift between scenarios and modify assumptions, adding a new layer of information to in-depth strategy discussions.

4. It’ll help you effectively communicate with key stakeholders
Among other uses, financial models are also powerful sales documents, which speaks volumes about a founders’ business acumen and commercial capabilities. Assumptions should be well-backed, but ambitious; growth expectations should be sensible, but compelling; and strategy points should be purposeful and well-timed. Little is more compelling to investors (and partners & future employees) than a founder who can show, not only qualitatively but concretely, why their success is inevitable.

A financial model isn’t just an exercise in futility; there’s a point to it. Several points in fact. A potential investor wants to see:

• that you have a good handle on the revenue drivers of your business;
• the evolution of your costs and expenses over time as compared to revenue growth rates to ensure that your business model is profitable and scalable;
• if you are realistic about growth potential;
• that your financials are complete and presented clearly; and, finally,
• how their investment will be used and whether more will be needed in the future (it probably will).

If you answer at least on time YES to one of these questions, you definitely need a Financial Model:

1. Do you want to build a (financially) sustainable business?
2. Are you looking for funding?
3. Do you want to avoid going bankrupt?

Different investors will have different opinions on financial projections. Some like to see them to see how a founder is thinking about their business. Others won’t ask for them as most startups likely will miss one way or another. Mark Suster of Upfront Ventures puts it similarly:
However, projections and financials will become more important later in your lifecycle stage. Where a seed round investor might not necessarily care about forecasts in the early days a Series C investor might want to see more concrete data to model growth. Hiring Plans
Building a financial model is a great way to understand how your overall business performance can impact hiring plans (and vice versa). By modeling different scenarios you can see how adding headcount can impact your bottom line.

Selecting an appropriate financial model for SaaS start-ups, there are certain standards that make it a good model. For example, it should be insightful and easy to understand yet not haphazard. Your financial forecasting models should pass on the following hallmarks:

• Accurate Assumptions

In a financial model, an assumption gives a clear idea of the company's growth as-per the current performance. Not only is it the starting point, but also an implication of the company’s upcoming financial statements. A good financial model should provide accurate, realistic, and quantitative assumptions of your SaaS business.

The model should provide equitable data that correlates with current performance and past values. It should be clear, without any irrelevant data. That's why it’s important to always check the values you are adding.

• Error-Free

Your SaaS financial model should be error-free and precise. The formula you use should be consistent, and the numbers should be accurate. Keep values clearly visible and free from fatal errors such as intricate models, lack of data integrity protection, illogical layouts, hiding rows/columns, complex formulas, etc. Also, it should not feature hard values as it makes the formula more complex.

• Flexible

Your SaaS financial model should be flexible and adaptable both in the present situation as well as in the long term. A dynamic model allows users to add various values into cash-flow projections, debt services, inflation rate, and other sections. In addition, different analysts can add different data based on their unique projections. So, your model should be adjustable and manipulatable across different fields.

• Simple and Easy to Understand

A good financial model doesn't have to be complex. Rather, it should be easy to read and understand, organized using a well-structured layout. Be consistent with page breaks, color schemes, columns, fonts, and every other element you use. Please remember that consistency and formatting make even complex models simple to understand.