Financial Modelling: Driving Success to Your Business

1. 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. Analyzing Risk Financial modelling exercises do not only apply in the commercial sphere. It`s also applied in the personal financial management. 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 Personal

2. 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.