What is Financial Modelling? — Business owners have posed this question to me often. While there can be several complicated definitions, simply put, it is the practice of projecting a business’s operating and financial results. Financial modelling allows you to see into the financial future of your business, to plan, and to understand if sufficient cash is available to meet your future operating needs.
Is Financial Modelling relevant to me? Every business, large or small, growing or struggling, needs to create robust business plans backed by sound financial forecasts. Successful businesses usually do this better than the ones that are struggling. Or reversing the argument, businesses that create sound financial forecasts are far more likely to succeed over time than the ones that do not.
What kind of questions can financial modelling answer? The short answer is – almost all types. Here are some examples:
For start-up businesses
- How much capital will I need?
- How many widgets/units do I need to sell and by when?
- What pricing should I use?
- What is my break-even point?
- What is the forecasted cash impact of my billing schedule?
For businesses facing cash crunch
- How long will my current cash last?
- What sales assumptions need to occur to allow the business to recover?
- How do I seek to change my supplier / customer terms to help conserve cash?
- When would I need to ask my bank to lend me some more money?
For well run, growing businesses
- What will it take to get to the next level financially?
- What would be the impact if the current growth plan goes awry?
- Which areas should we invest in to maximize growth?
- What is our best strategy?
- What costs should we watch out for going forward?
- How much would the business be worth in the future?
In essence, a robust, dynamic financial model that accurately reflects the business realities going forward is one of the most valuable tools a business can possess.
So, how then can you create a financial forecast? Wouldn’t it be useful if we could easily alter key assumptions and instantly see the results of those changes? It is possible to do this — all you need are the services of experienced specialists like us who would understand your business in details and then apply expert forecasting techniques using Microsoft Excel to come up with a robust financial forecast.
Watch out for the next part of this blog where I talk about what makes for a good financial model.