Financial models have many uses. From budgeting and forecasting to fundraising and investment decisions, financial models provide a wide range of insights and information for business owners.

One of the less well-known uses of financial models is negotiation. Using financial models as negotiation tools can help businesses get the most out of any deal they’re considering.

Here are some tips and benefits of using financial models as negotiation tools.

How to Use Financial Models for Negotiations?

Before using financial models for negotiations, it’s essential to understand how they work. Financial models generally involve analyzing various scenarios with different inputs and assumptions to determine the best possible outcome.

That’s precisely why they’re so helpful for negotiations. By analyzing various scenarios, you can determine what kind of deal is best for your business in terms of financial returns and other factors such as risk.

Let’s say you’re negotiating the terms of a contract. You can use financial models to determine what kind of payment schedule and interest rate are best for your business and what kind of revenue you can expect to receive. You can also use financial models to assess the potential risk if certain conditions are not met.

Likewise, you can use a financial model to determine the best way to structure a deal. For example, if you’re negotiating with investors, use a financial model to gauge which type of investment structure would yield the highest returns.

For example, you might opt for equity instead of debt if the expected returns are higher than with a loan.

The Benefits of Using Financial Models for Negotiations

Using financial models for negotiations can provide several advantages. Here are some of them.

Data-Based Decisions

Financial models provide a data-driven approach to making decisions. Instead of relying on intuition, the model can help you make decisions that are backed up by data.

Suppose you’re shaping a contract with a supplier. Instead of relying on instinct or guesswork, you can use a financial model to analyze the cost, revenue, and profit implications of each potential deal.

Better Understanding of Risk and Opportunity

Startups must make informed decisions, particularly when it comes to investments and negotiations. Financial models enable entrepreneurs to understand the risk/reward implications of each decision they make.

For instance, a startup might use a financial model to analyze the cost of investing in new technology. The model can help the startup quantify the benefits and risks associated with different levels of investment.

Improved Negotiating Position

Financial models can also give you an edge when it comes to getting the best deal in a negotiation. If your financial model reflects the true financial value of a deal, you can use it to bolster your negotiating position.

For example, if you’re negotiating with an investor or a supplier, you can use your financial model to show that the company will make more money with a particular deal. It could give you leverage in the situation.

Best Practices for Using Financial Models in Negotiation

If you’re planning to use a financial model when negotiating a deal, you mustn’t compromise on the quality of your model. A poorly-constructed financial model can lead to inaccurate assumptions, wrong conclusions, and bad decisions when negotiating. Here are some best practices to consider when using financial models in a negotiation.

Keep It Up-to-Date

Make sure the model is up-to-date and reflects the current market conditions. It includes running a quick check for any recent changes in relevant laws and regulations, financial industry developments, and other factors that can affect the results of your model.

Use Current Data

When creating a financial model, use the most recent and reliable data available. Data from outdated sources will lead to inaccurate conclusions and flawed results.

For example, you should use the current inflation and interest rates. However, suppose you used the inflation and interest rates from six months ago. It would result in incorrect calculations and faulty conclusions.

Verify Your Results

Once you’ve input your data and customized your model, double-check its results. Mistakes are easy to make when creating models, and even the most experienced user can overlook a potential error.

Use Comparisons

Whenever possible, use comparisons when negotiating with a financial model. For example, compare the expected rate of return from two different investments or determine how much money a company would save by switching to a new supplier.

Show the other party that you’ve done your homework. The more prepared you are for the negotiation, the better your chances of getting a favorable outcome.

Involve Expertise

If you’re not particularly familiar with the financial aspects of the negotiation, it’s best to involve an expert. You don’t have to be an accountant or financial analyst, but you should have someone on your team with the necessary knowledge and experience.

Customize Your Model

Rather than using a generic financial model, customize it to your specific situation. Even if you are dealing with similar circumstances as another negotiation, chances are the outcome will be different based on the specific variables and nuances of each case.

Customizing your model enables you to use accurate data applicable to the negotiation. For example, there’s no point in a real estate deal using a generic financial model that includes corporate tax rates and other variables that don’t apply.

Let Numberly Customize Your Models for Negotiations

Once again, customization is key in any negotiation. Every company, deal, and situation is different. That’s why Numberly provides customized financial modeling services to help you get the best possible outcome in your negotiations.

We understand that every startup is different and has specific needs. Generic models can often be too static in their approach and won’t provide the detailed insights you need. That’s why at Numberly, we use dynamic assumptions and a bespoke approach to create models tailored to our client’s needs.

Whether you’re negotiating a large corporate finance deal or a small transaction, you need a reliable financial model. Schedule a call with us to get us on board.