Founder Playbooks
💰 Finance

Building a Financial Model

A guide to building the three-sheet financial model — P&L, Cash Flow Statement, and Balance Sheet — that investors and operators rely on.

The Three-Statement Model

  1. Profit & Loss StatementThe P&L is the foundation of your model — it shows whether you're making or losing money by subtracting all costs from revenue.
    • Structure revenue lines by product, segment, or customer type for clarity
    • Track COGS separately from operating expenses to calculate gross margin
    • Show net income (or net loss) as the bottom line after all operating and non-operating items
    • Build monthly columns with a full-year and multi-year rollup view
  2. Cash Flow StatementThe cash flow statement bridges the gap between recognized revenue and actual cash in the bank — critical for understanding true runway.
    • Reconcile net income to operating cash flow by adjusting for non-cash items and working capital changes
    • Separate operating, investing, and financing cash flows
    • Track deferred revenue carefully — collected cash that hasn't yet been recognized as revenue
    • Use the ending cash balance to calculate months of runway at current burn
  3. Balance SheetThe balance sheet provides a point-in-time snapshot of financial health and is required for investor due diligence at any stage.
    • Track current and non-current assets including cash, AR, and capitalized software
    • List all liabilities: AP, deferred revenue, accrued expenses, and any debt
    • Ensure the fundamental equation holds: Total Assets = Total Liabilities + Owners' Equity
    • Reconcile the balance sheet to your P&L and cash flow statement every month

SaaS Revenue Modeling

  1. Build Revenue from the Ground UpA bottoms-up revenue model is far more defensible to investors than a top-down percentage-of-market estimate.
    • Start with customers at beginning of period, add new customers from all channels, subtract churn
    • Multiply ending customer count by average contract value or ARPU to get period revenue
    • Model new customer additions by channel (sales, marketing, PLG) with separate conversion assumptions
    • Show MRR and ARR as a derived output so investors can immediately see the subscription trajectory
  2. Track Key SaaS MetricsInvestors will scrutinize your unit economics above all else — build a dedicated metrics tab so these numbers are always front and center.
    • Track ARR, MRR, ARPU, and net revenue retention in a dedicated metrics tab
    • Calculate CAC (fully loaded) and LTV, and show the LTV:CAC ratio over time
    • Report gross and net retention separately — gross retention shows churn, net shows expansion
    • Include payback period: how many months of gross margin to recover the cost of acquiring a customer
  3. Model Costs by CategorySeparating COGS from OpEx is essential for understanding gross margin and the true unit economics of your business.
    • COGS: infrastructure, hosting, third-party API costs, and customer support directly tied to revenue delivery
    • Sales & Marketing OpEx: headcount, tools, and program spend — this drives your CAC calculation
    • R&D OpEx: engineering and product headcount plus any capitalized software development costs
    • G&A OpEx: finance, legal, HR, and facilities — typically 15–20% of revenue at early stage

Building vs. Using a Template

  1. Choose Your ApproachBoth building from scratch and adapting a template can work — what matters is that the model is tailored to your actual business.
    • Building from scratch: start with a P&L structure in Excel or Google Sheets, add monthly columns, then layer in revenue and cost drivers
    • Using a template: templates accelerate setup but always require customization — plan for 20–40 hours of tailoring
    • Avoid over-engineering early; a clean, well-documented model beats a complex one nobody understands
    • Lock assumptions in a dedicated tab so you can run scenarios without breaking formulas
  2. Recommended SaaS TemplatesSeveral well-regarded templates are available free or low-cost and are worth starting with rather than building from zero.
    • SaaS Financial Plan by Ben Murray — comprehensive and widely used by early-stage SaaS companies
    • SaaS Financial Model by Baremetrics — strong on unit economics and cohort modeling
    • Causal — modern tool for teams that prefer a more visual, formula-driven environment
    • Whichever you choose, customize the revenue drivers and cost structure to match your actual business model