Have you ever considered using a financial model but wondered what benefits it might bring your business? Whether you are a start-up seeking investment, or a mature business appraising the potential return on a project, a financial model is a key investment in aiding decision making and to secure funding.
What is a financial model?
A financial model is a tool used by management to estimate future financial performance . It is driven by modifiable inputs and assumptions that are bespoke to the business. For example, a model could be built to estimate the available market, expected penetration and changes in pricing to forecast the revenue achievable .
A good financial model is based on the latest financial position and incorporates a fully integrated profit and loss, balance sheet and cashflow. This ensures that the integrity of the model is maintained and presents the full picture of the business so that management can act proactively.
By building in the appropriate functionality a financial model may be a flexible tool that can be adjusted and sensitised for a number of different variables and projects.
Why do I need a financial model?
By building an expectation of future income, costs and cashflows, a financial model becomes an extremely useful tool in running your business. It outlines how a business is expected to develop in the short- and mid-term, enabling management to assess critical success factors and any cash shortfalls should targets not be met.
Commissioning a financial model is a highly valuable investment in itself. It provides a flexible format to test the impact of your business decisions on your finances, and will also act as a solid foundation on which to base your business plan. Financial models should also be maintained as live documents by updating with actual results, this ensures that there is no ‘shelf life’ and it can evolve with the business.
If you are seeking investment, a detailed financial model is critical. It demonstrates to potential investors that there is substance to your business plan which is supported by assumptions that can be challenged. An effective financial model will have the capability to flex inputs based on a range of potential scenarios, which in turn will provide a range of financial outcomes – these can be used as best and worst cases when discussing with investors.
How can Bishop Fleming help?
Our team of experts at Bishop Fleming have significant experience in financial modelling in a wide range of sectors. Please speak to one of our corporate finance advisors listed below if you are interested in exploring how a financial model could help you to grow your business.