Financial Modelling for business success

Business rarely seems to get easier from year to year. Whether its new regulations, more competitors, technological disruption, a stalling economy or COVID-19, complexity is always increasing and the business landscape becomes more difficult to navigate.

To stay a step ahead of the game, organisations have to be nimble and able to respond to changes quickly. And there’s greater emphasis on getting the response or decision making right, particularly for small businesses who aren’t as able to absorb the impact of the alternate.

This is where financial modelling can help.

A well constructed financial model should provide you with some base level financial data such as a profit and loss, cashflow and balance sheet. The depth and breadth of the underlying assumptions in the model should be detailed enough to consider multiple (possible) scenario’s and provide management with the confidence that should “x” occur and we do “y” the outcome will be “z”.

At a high level your “z” might be a level of profit, your cash flow or cash resources, the impact on the overall value of your business or a plan that helps your business survive through a crisis.

At a low level these scenario’s might be achieved by modelling changes in the addressable market and market share and how these might impact upon your sales. Changes in the price of key inputs to your business – for example, raw materials or staff. Raising capital to finance new machinery that increases production and manufacturing efficiency and how this flows through to profit and loss and cashflow. There are many other scenario’s you might consider, but the model must be built with an appropriate level of detail to provide you with information for your area of focus.

Beyond scenario analysis, financial modelling is most commonly used for budgeting and forecasting purposes. Budgeting and Forecasting should always contain assumptions that are measurable and traceable such that when favourable or unfavourable variances occur, they’re easily explained. And, as actual performance data becomes available, the financial model should update and then re-project the forecast such that management can see how the business is tracking over a given financial year.

It's possible to isolate a financial model to a particular business or product line to evaluate, for example, efficiency, cost, pricing, gross margin or product profitability. In this respect, they are an important input into strategic decision making if you’re considering to either continue, discontinue or perhaps, start a new product or business line.

Financial models have numerous applications. We’ve only touched on a few here to give a sense of how they can be deployed and how they might benefit your business.

Alucro Consulting can assist you with the simplest or even the most complex financial models. Book a free one hour consultation with us here today.