The Power of your financial Model

We often have our clients tell us, “The finances are what they are.” This is not necessarily the case and you must permit financial consultants the opportunity to examine your financials and design a model that presents all of the power and potential of your business. Financial Models are used to compile forecasts and budgets; to assess possible funding requirements; and to explore the likely financial consequences of alternative funding, marketing or operational strategies. They can also be used for business planning, raising finance, investment or funding appraisals, financial analysis, and corporate planning.

A Financial Model creates a fully integrated scenario analysis so you can identify the most important drivers of your business and the ability to create multiple funding scenarios. Benchmarking vs. publicly traded companies provides a reality check. You want a model with complete flexibility, so that it can be adapted to almost any business model; it should be battle-tested and venture capitalist approved while offering heady opportunity.

A model utilizes assumptions for sales volumes, prices, operating costs, funding and so forth, to produce projected balance sheets, profit & loss accounts and cash flow statements. Typically, it makes monthly projections for the first year and less detailed projections for the following years. Financial information dealing with the past is generally referred to as historical financial information. Information dealing with the future is typically called projected financial information. Both are extremely critical in assessing the opportunity.

Historical information will portray the financial path taken to date and results realized. It can give you a good sense of current financial stability or lack thereof. If an investment company is investing a significant amount of money, it may wish to delve a little deeper into the company's historical financial information to look at the past financial stability as an indicator of management.

Projected financial information needs to be very cautiously contracted, reviewed and analyzed. With the advent of computer modeling, extensive financial projections can be readily developed and presented very professionally. But beware: the accuracy of computer financial models can easily be distorted by even the smallest flaws in the logic of the assumptions that go into the model, or the calculation methods used.

Once initial assumptions have been entered, they can be readily altered to evaluate alternative scenarios. For example, a model could be used to explore the extent to which future sales can be increased while holding borrowings within predetermined limits; to assess the effects of varying selling prices and/or volumes on net profits; or to determine the optimum level and mix of future funding for your business.

It is also perhaps too easy to build a model on assumptions that go something like this: “If I could only get 1% of the market for this product, look what I can do!" Too much effort goes into the math and not enough attention is devoted to developing the plan to capture the market share. This reinforces the fact that you need to present logical assumptions for projections made in the business plan.

The projected financial information is the cornerstone of a detailed value analysis, which the investor will perform to establish the upside potential from the investment in your company. Quite simply, the value analysis extrapolates a future value for the business assuming it is able to achieve the anticipated results and calculates the investor's share of that value based on what percentage the investor will own.