Getting Started With Building a Financial Model

Every successful business needs a model to discern its current value and forecast future financial performance. A business model is necessary if you struggle with critical business analysis, as the analysis will require an income statement, balance sheet, cash flow statement, and supporting schedules to develop.

Financial modeling is applicable for many critical functions, like raising capital to manage accounts. With the archetype, you can visualize all aspects of your finances and see where improvements are necessary. The model will also enable you to make critical decisions like capitalizing, divesting, growing the business organically, etc.  

These essential tips can help you build a prudent financial model.

Set Your Objectives

Developing a financial model appropriate for your business begins by setting the objectives. The goals of a typical model are diverse, and you can have a single or multiple ones. Some essential purposes include raising equity, business valuation, selling part of the business, and acquiring other ventures.

Start by setting objectives for the financial model. Think through the purpose of your business to help you define succinct objectives. Ask yourself:

  • What are you looking to achieve?
  • What are your future goals?
  • What critical outcomes do you seek?

When you reflect on business goals, you can visualize how the financial model will help you achieve them. Try to keep objectives focused. If a financial model gets too broad with too many intentions behind its development, it can lack direction and guidance.

Also keep the goals realistic to avoid future disillusionment. However, avoid the pitfall of setting easily reachable targets as it will disable you from achieving business success.

Choose the Right Strategy

Be mindful of your strategic objectives when creating a financial model. The model is an enabler for your business, and it should align with company strategy. There are many fiscal model types, such as top-down forecasting, bottom-up forecasting, and correlation forecasting.

The difference in strategies is internal versus external considerations for charting business growth. The internal focus evaluates company resources and current customers, while the external one is about the total market size and other macro-environment factors. You can have one or a mix of approaches when developing the model.

The type of model you choose depends on the objectives you have for creating the model in the first place. You can build most strategies in Excel or Google Sheets. There is also software and other materials available to develop a specific type of financial model.

Find Someone to Build It

An essential success factor in developing a financial model is finding someone with expertise in business analysis and maneuvering spreadsheets. Make sure you have someone who can build the framework as this is very tedious and specific work. Be clear about your expected outcomes to judge the output of the work.

A financial model requires a lot of detail and formulas. You want someone who understands this and can customize the model to fit your needs. You can simulate the results you need before getting started on developing the backend computations. There are freelancers available who can offer their expertise on a particular financial model.

You can hire excel experts who are familiar with the capabilities of the spreadsheet software to build your desired model. Professionals can also advise you on the best dashboards for your desired outcome.

Be Consistent

Once you have clear objectives and strategies for your financial model, be consistent in applying them. Maintain your model and review it regularly. You can gauge the model output based on its ability to meet specific objectives. Keep adjusting the analysis until it serves your purposes well.

As your finances change, so should your model. There is a high likelihood that your model had specific assumptions like available capital for the business. If there are any unanticipated changes like newly injected capital or capital loss, revise your analysis for accuracy.

Be sure to update the analysis consistently and refer back to it when making critical business decisions. A correct setup should sharpen your decision-making and enhance business success. Avoid the pitfall of overlooking insights generated from the model and relying on hunches to make business decisions, such actions are detrimental to business progression. 

Build a Reliable Financial Model

You cannot develop a financial model at the click of a button, but you can take it through a rigorous process that ensures you only have to do it once. Creating a reliable model is about clarity of goals and alignment with business strategy. You should create a module that sets your business up for success with such clarity and a suitable expert.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.