Imagine: you run a biotech company. You have three processes running simultaneously. CMC development with a supplier in Belgium. Clinical work with a CRO in Germany. A regulatory process with an external agency in Utrecht. Each process has its own contract with payment obligations, its own timeline, and its own risk profile.
You need to know immediately if there’s a delay in the outsourced CMC work. What does that mean for your cash flow? For your next report to investors? For your runway?
If your financial model is a single combined budget, you won’t know the answer right away. You have to search, calculate, and estimate. And in the meantime, time keeps ticking.
That is the problem with most financial models in Life Sciences. They are built as an accounting report, whereas they should actually be a management tool.
Why financial modeling in Life Sciences is complex
In Life Sciences, you sometimes have ten processes running simultaneously. Clinical trials, CMC, regulatory, IP management, quality assurance, market research. Each outsourced. Each with its own contract, its own risks, its own potential delays.
A delay in the clinical process has direct consequences for your burn rate, your runway, and your next funding round. But also for the moment you reach the next valuation milestone, the milestone investors are counting on.
If you lump all those processes together in your accounting, you won’t see these kinds of effects until it’s already too late.
Best practice: separate general ledger accounts for each outsourced activity
What we at F.INSTITUTE recommend, and also apply in our own accounting, is creating separate general ledger accounts for each outsourced activity.
Specifically: for a biotech company, this means separate accounts for the clinical trial, for CMC, and for regulatory affairs. Every invoice that comes in is matched to the corresponding budget. Not to a general expense account, but to the specific subproject for which the quote was received.
What this achieves is that you know at any given moment: how much has been approved, how much has been invoiced, and how much remains in this subproject? And if a budget is in danger of being exceeded, you see it immediately. Not just at the end of the quarter.
This is accounting as the foundation. You build the model on top of it.
Life Sciences: Setting Up Your Financial Model as a Gantt Chart
If you set it up correctly, your financial model will look like a Gantt chart. For each activity and time period, you compare the expected costs against the actual expenses. Month-over-month.
This is valuable for two reasons.
First: you can spot delays coming before you’re in the thick of them. If a CRO indicates that the study will run two months over, you can immediately calculate how that affects your cash flow and your runway. You don’t have to wait for the next report.
Second: you can use this to communicate with investors. Not with a general update, but with concrete information per project. Where is it going well? Where are the risks? What is the effect on the big picture? That is the information a board of directors is waiting for.
Financial reporting: when do you need more detail?
That depends on your stage. In the early stages, for example a Proof of Concept or an initial funding round, a detailed model for each activity is often unnecessary. The number of ongoing processes is limited, the amounts are smaller, and the complexity is manageable.
But as soon as you raise a substantial round of funding, you’ll be dealing with more parties, more contracts, and more risk factors. Then you’ll want to know exactly what impact every delay or budget overrun has on the bigger picture.
And as your organization grows, perhaps into multiple product lines or a pipeline of various assets, granularity becomes a necessity rather than a luxury. You cannot manage an organization of that size based on a consolidated overview.
Budget vs. actual: how to maintain monthly control over your finances
The model only becomes truly valuable when you keep it up to date. Not just once a quarter, but month over month.
Every month, you compare by activity: what did we budget, what was actually spent, what is the remaining budget? If there are deviations, you analyze why. Is it a temporary shift? Is there a structural delay? Do you need to make adjustments?
That rhythm, budget versus actual per activity, gives you control over the organization. Not on paper, but in practice. You know where you stand. You can make adjustments before it’s too late. And you can show your board and investors that you’re in control.
That last point is no small matter. Investor confidence is largely based on the question: does this entrepreneur know what’s going on in his company? A well-designed financial model is one of the strongest proofs that the answer is yes.
In short, a Life Sciences company runs on milestones and runway. Make sure your financial infrastructure aligns precisely with that.
Want financial advice for your tech company?
If you want to explore this topic further and find out what F.INSTITUTE can do for your organization, don't hesitate to get in touch with us. We'd love to discuss your goals!
