When your financial model is a black box: document assumptions to build trust

Why Documenting Assumptions in Financial Models is Non-Negotiable

A financial model without clearly documented assumptions is a black box. For an investor, it creates uncertainty. For a new team member, it creates a roadblock. For you, the founder, it creates a constant risk of rework and confusion, especially when multiple spreadsheet versions circulate during a fundraising or diligence process. Juggling models without a central source of truth leads to conflicting numbers and stalls critical decisions.

The goal is to build a model that not only projects the future but also tells the story of your business logic. It should be a story that anyone can pick up, understand, and trust. This process is not about financial bureaucracy; it is about building a strategic asset for your startup. This guide explains how to document assumptions in financial models to build that trust. For specific forecasting methods, see the Building Financial Forecasts hub.

Foundational Understanding: What to Document

Before diving into methods, it is important to clarify what we are documenting. An 'Assumption Book' is the central repository for the logic driving your financial model. It can be a simple tab in your spreadsheet or a separate document in Google Docs or Notion. Its purpose is to make your thinking transparent and defensible, transforming guesses into credible forecasts.

A guess says, “We’ll grow 20% next month.” A defensible forecast says, “We will grow 20% next month, based on a 15% average from the last quarter’s performance data in Stripe, plus an anticipated 5% lift from the new marketing hire who starts on the 1st.” To achieve this clarity, every credible assumption requires five core components.

1. Assumption: The name of the driver. This should be a clear, descriptive label, such as 'New Monthly Subscribers' or 'Customer Churn Rate'.
2. Value: The specific input used in the model, including the unit (e.g., '150', '2.5%', or '$500'). This is the number that directly feeds into your calculations.
3. Source/Justification: Where the value came from. This is the most critical part. It is the evidence that grounds your model in reality, citing internal data sources like your accounting software or CRM, or external sources like market reports.
4. Rationale: The 'why' behind your logic. Why did you choose this source? Why do you believe this growth rate is achievable? This component connects the data to your strategic narrative.
5. Sensitivity: An estimate of how sensitive the model's outputs are to changes in this assumption (High, Medium, or Low). This helps prioritize focus and risk management.

Documenting these components is how you answer the key question: how do I prove my model is thoughtful and realistic? It moves your financial projections from a simple guess to a well-reasoned forecast, which is exactly what investors and strategic decision-makers need to see, enhancing your financial model transparency.

Choose Your Method: How to Document Assumptions with a 'Crawl, Walk, Run' Approach

The required level of documentation depends entirely on your startup's stage. A one-size-fits-all approach is inefficient and often leads to documentation that is either insufficient or overly burdensome. What founders find actually works is a staged approach, ensuring the effort matches the immediate need.

Crawl: The In-Model Notes (Pre-Seed)

At the earliest stage, your model is a fluid sketch, changing constantly as you refine your idea. A separate, formal document is overkill. The goal here is simple clarity for yourself and perhaps a co-founder. The focus is on speed and iteration, not on creating a formal record for outsiders.

• Method: Use cell comments directly in your spreadsheet (Excel or Google Sheets). Next to each key input cell, such as monthly price or new hires per quarter, add a concise comment explaining the value's origin.
• What it looks like: A comment next to the cell for 'Customer Churn Rate' might read: “2.5% - based on the average of the last 3 months of data. High sensitivity.”
• Pros: This method is fast, simple, and keeps the justification directly linked to the input, making it easy to reference as you build.
• Cons: Comments can become messy quickly, are difficult for an outsider to follow systematically, and are not suitable for a formal handover or due diligence review.

Walk: The Assumptions Tab (Seed Stage)

As you prepare for a seed round or bring on your first key hires, you need a more organized system that supports a formal startup financial model handover. An 'Assumptions' tab in your main financial model spreadsheet becomes the central source of truth. This directly addresses the pain of new team members not understanding the model’s logic, enabling collaborative financial planning.

• Method: Create a new tab dedicated to documenting financial projections. List every key assumption in a structured table with columns for the five core components: Assumption, Value, Source, Rationale, and Sensitivity.
• What it looks like: A row in your assumptions tab might be:
  • Assumption: New B2B SaaS Subscriptions/Month
  • Value: 20
  • Source: Hubspot conversion data (avg. 18/month) + 10% growth factor.
  • Rationale: Assumes slight acceleration from new outbound sales hire.
  • Sensitivity: High
• Pros: This approach is centralized, transparent, and easy for investors or new executives to review. It imposes a helpful discipline without being overly time-consuming.
• Cons: The documentation remains tied to a single spreadsheet file, which can still create version control challenges if multiple copies are being shared.

Run: The Standalone Assumption Book (Series A/B)

By Series A, your model is a critical tool used across the company for budgeting, hiring, and strategic planning. It needs to be robust, easily updated, and accessible to various stakeholders. A standalone document, often in Google Docs or Notion and linked to the model, is the most mature approach to assumption tracking for startups.

• Method: Create a detailed document that explains the model's architecture and assumptions section by section. You can link directly from cells in your spreadsheet to specific headings in this document, creating a seamless connection between the numbers and their narrative.
• Pros: This is the ultimate source of truth. It decouples the logic from the spreadsheet, allowing for more detailed narrative, screenshots of source data, and easier collaboration among team members.
• Cons: This method requires the most discipline to maintain. The document and model must be kept in sync, which demands a clear process for updating financial models.

What to Document: Key Assumption Categories for Investors

Which assumptions actually matter most to investors and leadership? They typically fall into three main categories: Revenue, Cost of Goods Sold (COGS), and Operating Expenses (OpEx). Your documentation efforts should focus primarily here.

Revenue Assumptions

This is where the distinction between Top-Down and Bottom-Up forecasting becomes critical. A credible model uses both.

• Top-Down (Market-Based): You start with the total available market (TAM) and work down to your expected share (SOM). This is useful for high-level context but must be backed by operational reality. You can use market research from sources like Gartner and Forrester for these assumptions.
• Bottom-Up (Company-Based): You build revenue from your company's actual, controllable metrics. This is far more credible to investors. Internal company data for bottom-up assumptions can be sourced from tools like Stripe, Mixpanel, and HubSpot.
  • For a SaaS company, this means documenting drivers like website traffic, conversion rates, new subscribers per month, average revenue per user (ARPU), and churn rate.
  • For an E-commerce business, key drivers include average order value (AOV), purchase frequency, and customer acquisition cost (CAC).
  • For a Professional Services firm, drivers are billable hours, team utilization rates, and average project fees.

When forecasting revenue, be mindful of accounting standards. In the US, companies must follow US GAAP, particularly ASC 606 for revenue recognition. In the UK, FRS 102 is the equivalent standard. If you forecast international sales, remember to model for foreign exchange (FX) risk and follow best practices for multi-currency accounting.

Cost of Goods Sold (COGS) Assumptions

These are the direct costs of delivering your product or service. Documenting these financial model assumptions clearly shows you understand your unit economics.

• SaaS/Deeptech: This often includes server hosting (AWS, Azure), third-party API costs, data processing fees, and licenses for essential customer support software.
• E-commerce: This is more straightforward and includes the cost of physical goods, payment processing fees (e.g., from Stripe or Shopify Payments), packaging, and shipping costs.
• Biotech: For a preclinical company, R&D is the main expense and not yet COGS. For a platform-based biotech, COGS might include specific reagents, cloud computing costs for data analysis, or other direct costs used to deliver services to partners.

Operating Expenses (OpEx) Assumptions

This covers all other costs required to run the business. The largest component is typically payroll, making headcount and salary assumptions critical to get right.

• Headcount & Salaries: Don't just list roles. Document your hiring plan by department and quarter, justifying each hire with a strategic need. For salary benchmarks, founder conversations are a start, but data is better. Market salary data can be sourced from platforms like Pave or Option Impact.
• Sales & Marketing: This budget should be tied directly to your revenue goals. Document your assumed CAC, the marketing channels you will use, and the budget required to hit your lead and conversion targets.
• General & Administrative (G&A): This includes rent, software, and professional fees (legal, accounting). While some investors use a percentage of revenue as a benchmark, it is better to build it from specific anticipated costs. For context, you can reference industry benchmarks for SaaS companies.

Strong justifications are specific and data-driven. Compare these examples:

Weak: “CAC is $500. Based on industry averages.”

Strong: “CAC is $500. Derived from our last three months of Google Ads campaign data in Hubspot, showing an average cost of $492 per new customer.”

Weak: “We will hire 5 engineers in Q3.”

Strong: “We will hire 5 engineers in Q3. This supports the product roadmap for Feature X, with salary assumptions benchmarked against Pave data for our stage and geography (USA).”

Stress-Test Your Logic: From a Static Model to a Strategic Tool

Clear documentation transforms your model from a static forecast into a dynamic tool for strategic decision-making. Once your assumptions are organized, you can easily test them through scenario planning and sensitivity analysis, showing investors you've considered a range of outcomes.

Scenario Planning

This practice answers the question, “What if things go better or worse than expected?” It is standard practice to model three cases by adjusting your key drivers. This demonstrates foresight and operational preparedness.

• Base Case: Your most realistic and defensible set of assumptions, grounded in your strongest data.
• Best Case (Upside): A more optimistic scenario. What if your conversion rate doubles or a large enterprise client signs up early? This scenario shows ambition and illustrates the business's full potential.
• Conservative Case (Downside): A more cautious scenario. What if a key hire takes longer to find or customer churn increases? This shows you are aware of risks and have planned for them. For most Pre-Seed to Series B companies, this is the most important scenario for managing cash runway.

By documenting the specific assumptions that change in each scenario, you provide a clear guide to your thinking. For example, “Conservative case assumes a 50% lower marketing conversion rate and a 2-month delay in hiring the Head of Sales.”

Sensitivity Analysis

This analysis identifies which assumptions have the biggest impact on your bottom line. Which one or two drivers, if changed by just 10%, would have the most dramatic effect on your cash runway or profitability? For an e-commerce startup, this is often CAC or AOV. For a B2B SaaS company, it might be customer churn or the length of the sales cycle.

By flagging these high-sensitivity assumptions in your documentation, you signal to investors that you know what drives your business. It focuses strategic conversations on the metrics that truly matter, turning your model into an essential tool for navigating the future.

Practical Takeaways for Building a Defensible Model

Documenting financial model assumptions is not an academic exercise; it is a core discipline for building a credible, fundable startup. Juggling different model versions without a central assumption book creates rework and undermines trust during due diligence.

To start today, choose the right method for your stage. If you are pre-seed, begin with simple cell comments. If you are preparing for a seed round, graduate to a dedicated 'Assumptions' tab. This simple structure makes your logic accessible to new team members and advisors, accelerating critical decisions.

The goal is to move from a guess to a defensible forecast by tying every key assumption back to a data source, whether it is internal data from Stripe or external benchmarks from industry reports. Focus your efforts on the assumptions that matter most: the drivers of revenue, COGS, and OpEx.

Finally, use this documentation to turn your static model into a strategic tool. Running best-case, base-case, and conservative scenarios shows you have a realistic grasp of the risks and opportunities ahead. This structured thinking does more than justify numbers; it builds confidence and demonstrates that you have a thoughtful plan to build a scalable company. Read more at the Building Financial Forecasts hub.

Frequently Asked Questions

Q: How often should I update the assumptions in my financial model?
A: For an early-stage startup, review key assumptions monthly and perform a deep update quarterly, often aligning with board meetings. You should also update the model immediately following major events like a new funding round or a significant change in market conditions to ensure it remains a relevant decision-making tool.

Q: What is the most common mistake founders make with financial model assumptions?
A: The most common mistake is failing to provide a clear source for each assumption. Founders often write down a number, like "10% monthly growth," without documenting the evidence. A defensible model links every key driver to a specific data point, whether it is historical performance, market benchmarks, or campaign data.

Q: How can I ensure my team uses the assumption documentation correctly?
A: Make the documentation the single source of truth and integrate it into your planning process. When discussing forecasts, always refer back to the assumptions tab or document. This creates a culture of financial model transparency and ensures that any changes to the model's inputs are first recorded and justified.

Q: Should my assumptions be in the spreadsheet or a separate document?
A: It depends on your stage. For pre-seed, in-cell comments work well (the "Crawl" stage). For Seed rounds, a dedicated "Assumptions" tab is best for investors. A separate document ("Run" stage) is ideal for Series A and later, as it allows for a more detailed narrative and supports collaborative financial planning.