Hardware startups face a modelling challenge that software companies don't: physical goods have real unit costs, inventory cycles, and supply chain dependencies. Yet most financial model templates are built for software economics, leaving hardware founders to improvise.
Bill of materials and gross margin
In a hardware business, the bill of materials (BOM) is the foundation of your cost structure. Every component, assembly step, and packaging element contributes to your cost of goods sold. Unlike software, where marginal costs are near zero, hardware margins are earned through careful supply chain management and scale economics.
Your model needs to capture BOM costs at a component level, account for volume discounts as you scale, and model the impact of supply chain disruptions. A model that shows flat margins over five years isn't credible — investors know that hardware margins evolve.
Inventory and working capital
Cash flow in hardware businesses is dominated by working capital cycles. You pay for components months before you collect revenue from customers. Inventory ties up capital. Minimum order quantities force you to commit to production runs that may exceed near-term demand.
A financial model that ignores these dynamics will dramatically overstate your cash position. The gap between "profitable on paper" and "running out of cash" is often the working capital cycle that wasn't modelled.
The manufacturing ramp
Going from prototype to production is one of the most expensive and uncertain phases of a hardware business. Tooling costs, certification, manufacturing setup, and yield rates all need to be captured in your model. The step-function nature of these costs — where you invest heavily before any revenue materialises — is fundamentally different from the gradual scaling of a software business.
Radley Finance handles these hardware-specific economics natively. The model structure understands inventory cycles, BOM scaling, and manufacturing ramps — so your projections reflect the actual economics of building physical products.
