Top 12 'Back-of-the-Napkin' Financial Models to start for Non-Technical Founders to Prove Their Business Case - Goh Ling Yong
You've got the million-dollar idea. The vision is crystal clear, you can see the product in your hands, and you can feel the impact it will have on the world. But then someone asks the dreaded question: "What do your numbers look like?" Suddenly, the creative energy drains away, replaced by the chilling image of complex spreadsheets, endless formulas, and terms like "EBITDA" and "discounted cash flow."
For many non-technical founders, the world of financial modeling feels like a locked room. It's intimidating, confusing, and seems to require a degree in finance to even approach. But here’s a secret: you don’t need a 50-tab Excel monster to prove your business has legs. In the early days, what you need is clarity, not complexity. You need a story told with numbers—a story that's simple, logical, and compelling.
This is where 'back-of-the-napkin' financial models come in. These are simplified, high-level calculations designed to test your core assumptions and answer the most fundamental question: "Can this business actually make money?" They are your first, most important step in translating a brilliant idea into a viable business case. Let’s break down the 12 essential models you can build today, no finance degree required.
1. The Core Revenue Formula
The What: This is the absolute bedrock of your financial projections. It breaks down your total revenue into its most basic components. The most common version is: Revenue = Number of Customers x Average Order Value (AOV) x Purchase Frequency.
The Why: This simple formula forces you to think critically about the three fundamental levers you can pull to grow your business. Do you need more customers? Do you need them to spend more each time they buy? Or do you need them to come back more often? It immediately shifts your thinking from a vague "make a million dollars" goal to a concrete operational plan.
Example & Tip: Imagine you want to start an online coffee bean subscription. Instead of just pulling a revenue number out of thin air, you model it: 500 subscribers (Customers) x $20/month (AOV) x 12 months (Frequency) = $120,000 Annual Revenue. Now you have a tangible goal: acquire 500 subscribers. Your assumptions are clear and can be tested.
2. Customer Acquisition Cost (CAC) vs. Lifetime Value (LTV)
The What: This model is the cornerstone of unit economics. It compares how much it costs to acquire a new customer (CAC) with the total profit that customer is expected to generate for your business over their entire relationship with you (LTV).
The Why: If your CAC is higher than your LTV, your business model is fundamentally broken. You’re spending more to get a customer than you’ll ever make back from them. A healthy business, particularly for investors, typically has an LTV to CAC ratio of 3:1 or higher. This model proves your marketing engine is not just a cost center, but a profitable investment.
Example & Tip: A SaaS company spends $1,000 on ads and gets 10 new customers. Their CAC is $100. Each customer pays $30/month and sticks around for an average of 18 months, generating a 70% profit margin. LTV = ($30 x 18) x 70% = $378. The LTV:CAC ratio is 3.78:1. That’s a healthy business! Start by estimating these numbers, then refine them as you get real data.
3. Breakeven Analysis
The What: This classic model tells you the exact point at which your total revenue equals your total costs. In other words, how many units do you need to sell (or how much revenue do you need to generate) to stop losing money and start turning a profit?
The Why: Knowing your breakeven point provides a critical milestone. It transforms your goal from "make a profit" to "sell X number of units per month." It helps in setting realistic sales targets and making informed pricing decisions. It’s a powerful reality check for any new venture.
Example & Tip: You’re selling custom t-shirts. Your fixed costs (website hosting, design software) are $500/month. Each shirt costs you $10 to produce (variable cost) and you sell it for $30. Your profit per shirt is $20. Breakeven Point = Fixed Costs / (Price - Variable Cost) = $500 / ($30 - $10) = 25 shirts. You need to sell 25 shirts a month just to cover your costs.
4. Total Addressable Market (TAM) Sizing
The What: This is a top-down model that estimates the total market demand for your product or service. It's often broken down into three parts:
- TAM (Total Addressable Market): The entire potential market.
- SAM (Serviceable Available Market): The segment of the TAM you can realistically reach.
- SOM (Serviceable Obtainable Market): The portion of the SAM you can capture.
The Why: Investors want to see that you're chasing a big opportunity. A TAM model demonstrates that you understand the landscape and have a realistic plan for capturing a slice of a meaningful market. It shows ambition grounded in data.
Example & Tip: You're launching a gourmet, organic dog food. TAM could be the entire global pet food market ($100B). SAM might be the organic pet food market in North America ($10B). SOM is what you realistically aim to capture in the first 3 years, say 1% of the SAM ($100M). Use reports from market research firms, government statistics, and industry publications to back up your numbers.
5. Cost of Goods Sold (COGS) & Gross Margin Model
The What: This model is essential for any business that sells a physical or digital product. COGS represents the direct costs of producing what you sell (e.g., raw materials, manufacturing). Gross Margin is your (Revenue - COGS) / Revenue, expressed as a percentage.
The Why: Your Gross Margin is the money left over to pay for all your other expenses like marketing, salaries, and rent. A low gross margin means your business might struggle to be profitable even at a large scale. This model helps you understand the core profitability of your product before you factor in overhead.
Example & Tip: A furniture maker sells a table for $1,000. The wood (raw materials) costs $300 and the direct labor to build it costs $200. The COGS is $500. The Gross Profit is $500, and the Gross Margin is ($1000 - $500) / $1000 = 50%. A healthy margin gives you room to grow.
6. Monthly Burn Rate & Runway Calculator
The What: This is the ultimate survival metric for a startup. Your Burn Rate is the net amount of cash you’re losing each month. Your Runway is how many months you can survive before you run out of money, calculated as Total Cash / Monthly Burn Rate.
The Why: This isn't just a financial model; it's your company's countdown clock. It dictates when you need to raise funding, when you need to hit profitability, or when you need to make tough decisions. It instills a sense of urgency and financial discipline from day one. This is a framework I, Goh Ling Yong, frequently advise founders to keep on a live dashboard.
Example & Tip: You have $100,000 in the bank. Your monthly expenses (salaries, rent, software) are $15,000 and your monthly revenue is $5,000. Your net burn is $10,000 per month. Your runway is $100,000 / $10,000 = 10 months. You have 10 months to either increase revenue, decrease costs, or secure more funding.
7. SaaS/Subscription Model (MRR Growth)
The What: For any recurring revenue business, this is the holy grail. It tracks Monthly Recurring Revenue (MRR) and its components: New MRR (from new customers), Expansion MRR (from existing customers upgrading), and Churned MRR (from customers who cancel).
The Why: Unlike a one-time sale, subscription revenue compounds. This model shows the health and momentum of that compounding engine. It helps you understand if you're truly growing or just replacing churned customers (a "leaky bucket").
Example & Tip: A project management tool starts the month with $10,000 MRR. They add $2,000 in New MRR, get $500 in Expansion MRR from existing clients buying more seats, but lose $1,000 in Churned MRR. Net New MRR = $2,000 + $500 - $1,000 = $1,500. The next month starts at $11,500 MRR. This is a story of healthy growth.
8. Marketplace/Platform Model (GMV & Take Rate)
The What: If your business connects buyers and sellers (like Etsy, Airbnb, or Uber), your core model isn't just about your revenue. It's about Gross Merchandise Volume (GMV)—the total value of all transactions on your platform—and your Take Rate, the percentage you keep as revenue.
The Why: GMV shows the scale and activity of your ecosystem, which is what attracts more buyers and sellers (the network effect). Your Take Rate shows your ability to monetize that activity. Both are critical for proving the viability of a marketplace.
Example & Tip: A platform for freelance designers facilitates $500,000 worth of projects in a month (GMV). The platform charges a 15% fee on every project. Their Take Rate is 15%, and their monthly revenue is $500,000 * 15% = $75,000.
9. E-commerce Funnel Model
The What: This model maps out the customer journey on your e-commerce site, tracking conversion rates at each step: Website Visitors -> Viewed Product -> Added to Cart -> Initiated Checkout -> Purchased.
The Why: It helps you diagnose exactly where you are losing potential customers. Is the problem getting traffic (top of the funnel)? Or is it that people are abandoning their carts at the last step (bottom of the funnel)? This model turns vague problems like "low sales" into specific, fixable issues.
Example & Tip: 10,000 visitors come to your site. 2,000 (20%) add an item to their cart. 500 (25% of those) start checkout. 400 (80% of those) complete the purchase. Your overall conversion rate is 4%. You can now work on improving each specific step.
10. Freemium Conversion Model
The What: For businesses offering a free tier (like Spotify or Dropbox), this model is crucial. It calculates how many free users you need to generate one paying customer. The core formula is: Total Free Users x Conversion Rate = Paying Customers.
The Why: Freemium isn't free—the cost of supporting free users is a marketing expense. This model determines if that expense is justified. It forces you to focus on the value proposition of your paid plan and the mechanisms you use to encourage upgrades.
Example & Tip: A note-taking app has 100,000 free users. It has a 2% conversion rate to its premium plan. That means they have 2,000 paying customers. To get another 100 paying customers, they know they need to acquire 5,000 more free users, assuming the conversion rate holds steady.
11. Service-Based Business Model (Billable Hours)
The What: This is for agencies, consultants, freelancers, and other service providers. The simple revenue model is: Number of Billable Employees x Billable Hours per Employee x Average Hourly Rate.
The Why: This model highlights the key drivers of a service business: headcount, utilization (what percentage of time is actually billable to clients), and pricing. It quickly shows that your growth is tied directly to your ability to hire and keep people busy on client work.
Example & Tip: A design agency has 5 designers. They aim for a 75% utilization rate on a 40-hour week (30 billable hours). Their blended average rate is $150/hour. Monthly revenue = 5 designers x (30 hours/week * 4 weeks) x $150/hour = $90,000.
12. Content/Media Business Model (Ad Revenue/Sponsorship)
The What: If your business is built on content (a blog, YouTube channel, or newsletter), your revenue is often tied to your audience size and engagement. A simple model can be: Traffic (e.g., Monthly Pageviews) x CPM (Cost Per Mille/1000 Impressions).
The Why: This grounds your content strategy in financial reality. It shows the direct link between growing your audience and growing your revenue. It also helps in evaluating other monetization strategies, like sponsorships or affiliate income, by comparing their potential earnings to your baseline ad revenue.
Example & Tip: A food blog gets 200,000 pageviews per month. The ad network pays an average of $10 CPM. Monthly Ad Revenue = (200,000 / 1,000) * $10 = $2,000. Now you can set traffic goals to hit your revenue targets.
Your Numbers Tell a Story
These back-of-the-napkin models are not about achieving accounting perfection. They are about building your confidence and proving, first to yourself and then to others, that your brilliant idea has a real, tangible path to becoming a sustainable business. They are tools for thinking.
As you grow, these simple models will evolve. Your one-line revenue formula will become a detailed forecast. Your CAC estimate will become a sophisticated marketing attribution model. But the foundation remains the same. Here at Goh Ling Yong's blog, we believe that every founder, technical or not, can and should become fluent in the story of their own numbers.
Don't let the fear of spreadsheets hold you back. Pick one of these models, grab a napkin (or a blank spreadsheet), and start sketching out the financial story of your business today.
Which model are you going to start with? Share your thoughts or questions in the comments below—let's get the conversation started!
About the Author
Goh Ling Yong is a content creator and digital strategist sharing insights across various topics. Connect and follow for more content:
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