Smart Businesses Use Financial Modeling To Anticipate Future Growth

Written by allroads. Posted in Financial Modeling

Financial model on a tablet
Wouldn’t doing business be so much easier if CEOs could see into the future? Unfortunately the closest a business owner or leader will ever come to having a crystal ball is establishing a strong, fact-based financial model. Not only do these models provide CEO’s with the best possible view into their financial future, they are also imperative when attempting to secure additional capital. No banker, loan officer or investor will sit down and have a meaningful discussion with a business owner who doesn’t have a financial plan.

Financial Modeling: Building A Roadmap For The Future Of A Business

Financial modeling is the process of anticipating how much capital a business will need, and when and why they’re most likely to need it, when planning for multi-year revenue growth. Financial modeling establishes a roadmap for a business by:
  • Identifying and mitigating risks associated with growth alternatives.
  • Projecting capital requirements for various growth options.
  • Providing an incentive for investors and lenders.

Look To The Past To Predict The Future

The goal of financial modeling is to predict and plan for the next two years. The most accurate way to accomplish this is to review the last 24 months, identify trends, establish a baseline, and modify your assumptions so that the inevitable surprises are minimal.

Past benchmarks are the best yardstick to measure cash flow needs for the future.

What were your staffing costs over the last two years? What was the cost of goods sold? Once a business establishes the pattern of its base expenses, a trajectory appears. It can then adjust that trajectory for anticipated growth. If the goal is to double revenue, for example, financial modeling will help a business determine if they’ll also have to double manpower or commercial space in order to achieve that goal.

Then, the business will be able to plan and budget for those expenses without encountering the pinches that may arise in the absence of good planning. They won’t run into a situation where they need to secure a loan immediately, and won’t have to settle for unfavorable terms.

Most small businesses don’t take advantage of financial modeling. Generally, businesses only do a deep examination of the coming two years if they’re planning to sell or undergo some other major change. In many cases, business owners are often content to do tomorrow what they did yesterday. Financial modeling is not necessarily difficult to execute, but it is a discipline that small business owners need to make a priority in order to maximize their organization’s future success.