Understanding Financial ModelS (Without Drowning in Spreadsheets)

If you’ve ever wondered how businesses make real decisions — not just gut feelings or slides — there’s usually a model behind it. A “model,” doesn’t mean a bloated Excel file with 12 tabs and unreadable formulas. It is a structured way of asking:
“If we do this, what’s likely to happen?”

At its core, that’s all a financial model is: a thinking tool.

So what does a model actually do?

A model connects assumptions to outcomes.

You start with a few inputs — maybe price per customer, cost to serve, projected growth.
Then you work through the logic:

• How much revenue does that generate?

• What are the fixed and variable costs?

• What’s left over?

• And — often most importantly — how much cash is in the bank at the end of each month?

It’s not magic. It’s just making the economics of a business visible.

A basic example — no coding, no formulas

Let’s say you run a small subscription service.

• You charge $10/month.

• You have 200 users.

• You spend $500/month on tools and support.

• For every user, you spend $1/month to keep the service running.

With that:

• Revenue: 200 × $10 = $2,000

• Variable costs: 200 × $1 = $200

• Fixed costs: $500

• Profit: $1,300/month

Now imagine you want to grow. You can ask:

• What happens if we add 10% new users each month?

• What if 5% of users cancel each month (churn)?

• What if we raise prices to $12?

You don’t need a fancy model to ask these things. But eventually, you’ll want a structure to help you see them over time. That’s what modeling is for — not to give you one “answer,” but to help you understand how everything fits together.

Why this matters more than ever

In an environment where costs are up, capital is limited, and markets shift quickly, guessing is expensive.

A basic model helps you:

• Understand your break-even point

• Forecast how long your cash will last

• See how fragile or resilient your business actually is

That applies whether you're working on your own idea, inside a company, or reviewing someone else’s plan.

Final thought

Financial modeling isn’t about being perfect with numbers. It’s about learning how to think clearly about cause and effect. It’s a practical skill — not a theoretical one — and like most practical things, it starts small and builds with practice.

In the next article, we’ll go deeper into two concepts that matter a lot:

• CAC (Customer Acquisition Cost)

• LTV (Customer Lifetime Value)

Once you understand those, the economics of a business start to make much more sense.