When it comes to financial modeling, comprehensive can mean many different things. Too often, ‘comprehensive’ can result in unnecessary complexity. Creating a comprehensive financial model starts with understanding the objective of the founder, the business, and the model, ensuring those needs are addressed comprehensively. 

We’ve worked with founders who’ve shared detailed assumptions about various possible scenarios, including product variants, price points, manufacturing options, subscriptions, marketing, and acquisition funnels – all in the same model. Does this make the potential model that could be built a comprehensive one? 

We’d argue not; it makes it very complicated and possibly not very usable, but it could be built. We encourage founders to focus on being very clear about what matters to them at a current point in time. Then, we focus on modeling that for them. A clear and well-understood model addresses the points that the founder is focused on now, bringing clarity and insight that covers all the points that investors and founding teams need.  

A financial forecasting model should include an analysis of the current market conditions, potential growth opportunities, and any risks associated with investing in a particular venture.

Plus, it must identify the funds and resources needed to capitalize on the opportunities identified. This information will help management evaluate financial options, make well-informed decisions, and determine the best course of action for the business.

Creating a financial forecasting model is a challenging task. It requires an in-depth evaluation of current and future market conditions and an understanding of the various investment opportunities available. Let’s learn more about it.

How to Create a Comprehensive Financial Forecasting Model: A Step-Wise Approach

Financial forecasting influences everything from the size of a business’s expansion to the kind of products it should offer. Here are the standard steps to create a financial forecasting model.

Step 1: Determine the Purpose of the Forecast

The first step in building a financial forecasting model is determining its purpose. Ask yourself what you need the model for. What kind of questions do you need to answer? Is it for budgeting or capital expenditure planning? Answering these questions will help you decide on the forecasting model to use.

For instance, budgeting requires short-term forecasting models, and capital expenditure planning requires long-term forecasting models.

Step 2: Gather Relevant Data

Once you have a direction for your financial forecasting, it’s time to gather the data and analyze it. The data must be collected based on reliable sources such as market research, industry reports, and financial statements of competitors.

In addition, you must also consider economic trends and the current state of the investment markets. You should collect data about the following:

• Investments
• Liabilities
• Losses
• Revenues
• Expenditures
• Taxation
• Earnings per share
• Fixed costs

Again, the type of data you collect will depend on the purpose of your financial forecast. For example, if you’re creating a budget, you won’t need to consider the profit margins of other companies.

Step 3: Select a Timeframe

How far into the future do you want to forecast? Short-term forecasting models are designed to predict the future within a year or two. On the other hand, long-term forecasting models can extend to 5-10 years into the future.

The time frame you select will determine the accuracy of your forecast model. Short-term forecasts are more accurate as they’re based on recent events and trends. Longer-term forecasts often rely on assumptions about too far into the future and can be less reliable.

Step 4: Select a Forecast Method

Typically, you can use one of the two financial forecasting methods:

• Quantitative: It uses data and historical information to project future trends. The method is helpful in predicting the performance of a business in the short to medium term.
• Qualitative: It uses subjective data such as opinions and insights from experts to project future trends. Besides opinions on the company, a qualitative model can also incorporate expert insights about the market as a whole.

Opt for quantitative models if you seek a more accurate forecast. Meanwhile, qualitative models are useful for getting perspectives on how an industry or market may evolve.

Step 5: Analyze the Data

Once you have gathered the required data, it’s time to analyze it. You must combine qualitative and quantitative information to gain a more accurate picture of the future.

Financial forecasting models are often based on assumptions and estimates. That’s why it’s essential to use several sources of information and crunch the numbers from different angles.

Step 6: Create the Forecast Model

Now, it’s time to create your financial forecast. Depending on the method you have chosen, you can use spreadsheets or forecasting software to get the job done.

You should also consider the data points that are most relevant to your analysis. For example, if you’re creating a budget, you should focus on revenue and expenditure data points.

Step 7: Monitor and Adjust the Model

Creating a financial forecast is just the start. You must monitor the model regularly and adjust it if needed. Market conditions can change quickly. So, you need to update your forecast accordingly.

Likewise, you should also monitor the performance of your actual financial results and compare them to the forecast. If there’s a large difference between the two, it’s time to review your assumptions and data sources.

Finally, you should communicate the results of your financial forecast to stakeholders regularly. It will help keep everyone informed and allow them to make better decisions.

Tips to Ace Your Financial Forecasting Model

Here are some tips to make this process easier.

• Create a Plan: Create a roadmap for your entire forecasting process. Break down the various steps, such as collecting data, and assign completion dates to each.
• Use Automation: Automating the process can save you time and effort in the long run. You can use automated tools to collect and analyze data.
• Analyze Alternatives: Try to analyze different possible outcomes. When you look at the data from various angles, you can gain better insights and make you more informed.

Let Professionals Take Charge

Creating a financial forecasting model is no easy feat, especially for startups with limited resources. It requires a lot of data analysis and expertise to get it right.

Numberly has the expertise and resources to create an accurate financial forecast for your business. Our team will work with you to understand your unique needs and build a model to help you make the best decisions. Contact us today to get started.