Financial Model Red Flags: Mistakes That Kill Investor Confidence

Hockey Stick Without Drivers

Revenue suddenly explodes in Year 3+ without corresponding changes in go-to-market investment, product launches, or market expansion. Growth must be connected to specific initiatives with realistic timelines.

Fix: Link revenue growth to specific drivers: sales hires, marketing spend, product launches. Show cause and effect.

Straight-Line Growth Forever

Projecting 50% growth every year for 10 years. Growth always slows as you scale—market saturation, competition, and operational complexity take their toll.

Fix: Model declining growth rates over time. If you're growing 100% now, expect 60% in Year 2, 40% in Year 3, etc.

Ignoring Churn

Projecting recurring revenue without modeling customer losses. Every subscription business has churn—assuming zero is fantasy.

Fix: Model churn by cohort. First-year churn is typically higher than subsequent years. Show your retention curves.

"We Just Need 1%"

Top-down market sizing that assumes capturing "just 1%" of a massive market. This ignores the difficulty and cost of acquiring market share from established players.

Fix: Build revenue bottoms-up from unit economics. Then sanity-check implied market share against realistic comparables.

Magical Margin Expansion

Margins that improve dramatically without operational changes. Moving from -40% to +25% EBITDA margin requires specific cost reductions or efficiency gains—not just hope.

Fix: Justify margin improvements with specific initiatives: scale economics, automation, pricing power, cost cuts.

S&M Costs That Don't Scale With Revenue

Sales and marketing expenses staying flat while revenue triples. Customer acquisition costs money—more customers means more spend.

Fix: Model CAC explicitly. Tie marketing spend to customer acquisition goals with realistic efficiency assumptions.

Ignoring Working Capital

Fast growth consumes cash through AR, inventory, and prepayments. Models that ignore working capital dramatically overstate cash position.

Fix: Model working capital as percentage of revenue. Include DSO, DPO, and inventory days based on your actual terms.

Missing Headcount Costs

Showing headcount growth without corresponding G&A increase. More people need more office space, tools, HR support, and management overhead.

Fix: Use fully-loaded costs per employee that include benefits, taxes, equipment, and overhead allocation.

Hard-Coded Values in Formulas

Numbers buried inside formulas instead of linked to assumption cells. Impossible to update assumptions or understand the logic.

Fix: All inputs should be in dedicated assumption cells, color-coded, and referenced by formulas. Never type numbers into formulas.

Balance Sheet Doesn't Balance

Assets ≠ Liabilities + Equity. This fundamental accounting error signals that the model wasn't built by someone who understands finance.

Fix: Include a check row that calculates (Assets - L - E) and flags any period where it's non-zero.

Disconnected Statements

P&L, Balance Sheet, and Cash Flow built independently. Net income should flow to retained earnings; D&A should add back to cash flow; etc.

Fix: Build integrated 3-statement models where changes cascade appropriately across all statements.

Circular Reference Errors

Interest expense affecting cash affecting debt affecting interest. Unresolved circular references cause Excel errors or infinite loops.

Fix: Break circularity by hard-coding interest as a percent of average debt, or use Excel's iterative calculation settings carefully.

Over-Precision

Forecasting revenue to the dollar for periods five years out. False precision signals lack of understanding about forecast uncertainty.

Fix: Round to meaningful units: thousands for near-term, millions for long-term. Show ranges, not point estimates.

No Scenario Analysis

Only showing the base case. Sophisticated investors want to see downside scenarios and understand risk tolerance.

Fix: Include base, upside, and downside scenarios. See our sensitivity analysis guide for building robust scenario frameworks.

Inconsistent Definitions

Using different formulas for the same metric (e.g., CAC calculated differently in different tabs). Creates confusion and distrust.

Fix: Document metric definitions clearly. Calculate each metric once and reference that cell everywhere.

Missing Historicals

Projections without historical context. Investors want to see the trend you're projecting from and how actuals have compared to prior forecasts.

Fix: Include at least 2 years of historical data. Show how projections connect to recent performance.