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Financial Modelling: Driving Success to Your Business
Developing a solid financial model, and using it on your business is one of the essential components
required in building a successful business empire. Most companies, however, only develop their
annual budget based on profit or loss statements for the coming year. While this method might serve
a picture of revenue and expenses to be expected, it does not adequately reflect nor answer what will
happen to the company’s expected future cash flows and the most likely scenarios for the company.
Successful business management requires from time time to undertake full financial modelling
exercises in order review the expected financial performance of the business and based on the
expected future cash flows. This process is particularly instrumental to firms which are about to
undertake major financial investments such as financing of new projects, considering changing the
capital structure or taking on new debt, update their budget and financial 5 year plan, or evaluating
the acquisition of another company.
Forecasting the Future
Many entrepreneurs see no value in predicting or to understand what will happen in the future. Many
are often quoted saying, “why think about the future and yet you cannot change it”. While this
statement is probably true, it fails to consider that understanding the important factors which will
determine a company’s financial future can empower them to make better decisions as the future
becomes present. Furthermore, its also a test how good the management’s industry experience is, as
one can compare actual vs. budgeted performance in hindsight.
Financial modelling plays an integral part in determining the viability of your business five or ten years
from now. A good financial model helps firms to maneuver through unforeseen internal and external
challenges, tweak part of their revenue and cost structure to manage the uncertainties.
Financial modelling exercises do not
only apply in the commercial sphere.
It`s also applied in the personal
financial modelling helps in answering
all the “what if” questions with regards
to your financial needs. For example, it
answers questions like what would
happen if you lost your job? How long
would your existing savings carry you?
What would happen if you had an early
retirement? What is your current
financial health? Does it allow you to
borrow a loan? By adjusting your
assumptions to reflect the different
financial possibilities like the one
mentioned above, one can identify and
understand the risks to your financial future, and even try to mitigate those risks.
Viability and Credibility
It`s not surprising that many financial lending institutions or venture capitalists are requesting for
financial models before they approve your loan. Lenders want to see your financial model and
understand how it works. They ask questions about your assumptions and may want to know more
about your historical performance to validate your requests. Fortunately, a financial model clarifies on
the external monies needed, the intended use, and the repayment period. Therefore it`s only prudent
that you have a qualified financial modelling consultant to craft a financial model for your business.