Six Benefits of Using Financial Models

Written by allroads. Posted in Financial Modeling

Gathering around financial planning
A financial model is a set of assumptions about future business conditions that drive projections of a company’s revenue, earnings, cash flows and balance sheet accounts. In practice, we use financial model in a spreadsheet form (usually in Microsoft’s Excel software) to forecast a company’s future financial performance.

Properly projecting earnings and cash flows into the future is important since the intrinsic value of a company depends largely on its outlook for financial performance. However, many small businesses do not utilize financial modeling to help make better business decisions and mitigate risk related to them.

Discover 6 benefits of developing financial models for your business:
  1. While financial models will always be wrong – no one can predict the future – being prepared for what might happen is invaluable.
  2. A financial model can provide a monthly assessment of exactly how the business performed versus what the plan (or budget) forecasted it would. This is great feedback for smaller business owners who may not be used to the budget or planning process.
  3. Multiple “what if” scenarios are easily examined by changing assumptions as opposed to building new models for each scenario. You can examine the key business drivers and build the model around inputs like pricing, cost, new customers, gross margin and other key business variables.
  4. Financial models provide quick insight into future capital requirements months in advance so that these needs can be anticipated and procured.
  5. Models can be used to analyze risk by forecasting the impact of price changes, the cost of new market entry, marketing campaigns, etc.
  6. The model can be shared with different people in different locations for input and analysis.

Many business owners aren’t advocates of financial analysis through modeling because it isn’t as exciting to work on numbers than to build up a product. However, if it is something you don’t personally enjoy, it is best to seek assistance as financial modeling is an asset to your business. Remember: you don’t have to do it all, but you do have to know it all.