Seasoned professionals are aware of the volatile nature of the business environment; therefore, they plan to thrive in the face of uncertainty.

Strategic planning around breeding financial modeling benefits is highly appreciated and practiced by startup founders because of the following facts:

• It details your company’s present position

• Accounts for resources

• Prioritizes your objective

• Calculates the budget

• Identifies where your organization is heading, and

• Outlines actions to achieve the organization’s short-to-long term goals.

However, startup founders often miss out on some crucial details while running their business because of their hectic schedules and being occupied with numerous works.

To help you best position your business and keep it afloat in difficult times, here we have discussed some of the commonly overlooked financial modeling aspects that you should value in your dealings.

Business Growth

Knowing your business model is advantageous as it enables you to drive your business efficiently, avoid business risks and exploit opportunities utmost. Business owners get this understating from the financial model as it summarizes a company’s performance which determines a range of variables influencing your business’ success.

It is crucial for startup founders to timely identify opportunities, threats, patterns, and issues of the economic environment.

The model offers comprehensive strategies and a framework that can foster your growth. 

To make businesses stay proactive towards achieving their targets, companies perform variance analysis which calculates the difference between the forecasted and actual figures against a particular accounting category and perhaps, indicates a shortfall.

Access to finance, human resources, management skills, and creativity can significantly drive profitability.

Financial experts termed it an intelligent plan as it ensures that you meet your defined targets and manage business priorities based on the estimated data.

Members of the senior management also get insights from this management tool to make prompt and feasible decisions about the business operations and economic events.

This model serves as a management tool gathering input from different departments and apprises stakeholders of the new methods and the expected risks associated with growth.

Funding Strategy

Out of all financial modeling benefits, having a clear picture of the business and capital takes the lead as it enables founders to understand their position in the market. 

Depending upon the need, the business owner can anticipate their stock performance, business valuation, cash flow, new project’s cost calculation, budgeting, funding, and profitability.

The financial plan informs and updates your shareholders on the cash flow requirements, allowing you to make a well-informed decision. The model enables entrepreneurs to raise capital for their business which could be a debt or equity. Often, the cost of debt is lower than the cost of equity, given debt has recourse.

Entrepreneurs often use loans and bonds to fund new projects and fuel their expansion projects. When applying for loans from a financial institution, the decision on the amount, interest rates, repayment period, and schedule are all based on the financial plan presented by your company. Though, some companies may use credit cards to raise their capital.

Since critical business decisions need financial analysis, the ability to construct a financial plan is an important skill.

Forecasting

Business owners use financial models to forecast their organization’s financial performance because it provides valuable insights into the business performed in the past and allows them to plan their next steps concerning funding, operations, and budgeting.

Financial modeling is performed on the company’s balance sheets, cash flow, and income statements to predict a company’s revenue. 

Senior management defines objectives for planning, budgeting, and resource allocation, in an attempt to avoid uncertainties and make sound business decisions.

Usually, financial professionals consider an organization’s current internal trends, market conditions, and consumer behavior when developing a financial plan. It enables startup founders to assess various potential factors which might impact the company’s near- and long-term performance.

For instance, analysts in Real Estate organizations use financial forecasting at the beginning of each accounting period to predict whether sales will increase or decrease depending upon the data they have on hand. Based on the available information and estimation, the company makes predictions of sales targets.

Risk Assessment

Financial analysts define risk in a business as the probability of an event happening in the future. 

Risks represent some unique situations that the business may not have seen before.

Failure to predict and manage those uncertainties beforehand can create the following severe consequences for companies:

• Losing market share

• Losing enormous investment dollars

• Harming the company’s reputation

• Decreasing production output

• Low-quality consumer products

• Poor production efficiency

To avoid such damage to your business and make a well-informed decision in the face of uncertainties, financial modelers develop a framework where they identify risk factors.

The risk assessment involves analysis and prioritization using performance models, cost models, network analysis, statistical decision analysis, and quality factor analysis.

Once the magnitude of each risk item is determined, it is then monitored and managed using various techniques such as:

• Checklists of risk-resolution techniques

• Cost-benefit analysis, and 

• Standard risk-management plan outlines.

The fund manager uses the financial model to quantify the potential for losses in an investment and implies a risk resolution technique that will set benchmarks, perform simulations, establish prototypes, and assess incremental development of the project’s progress by tracking the response of the corrective action.

Business Valuation

When a business owner plans to sell or liquidate its business resources, intends to add shareholders or expands its business, it will turn to a professional business evaluator to estimate the valuation. 

The most common valuation methods used by the valuation experts include the market approach, cost approach and income approach to review financial statements, evaluate discounting cash flow models and perform company comparisons.

The modeling also provides the best framework to company owners for business valuation who aims to sell a significant chunk of their business assets due to financial, political, or social reasons. 

The business plan often practices the divestment strategy based on the outcome of the retrieved results, where owners aim to maximize the value of their company and reduce debts.

Some other key benefits of financial modeling include Mergers, Acquisitions, Financing Transactions, Tax and Succession Planning, Litigation, and getting insight into growth and profit drivers.

The team of experts at Numberly is committed to helping you craft an effective strategy and truly enjoy financial modeling benefits. We help business owners in making more informed, data-driven decision to drive their business forward.

We support business founders by working alongside them, helping them understand their businesses better, and providing them with a bespoke financial model tailored to their business goals and objectives.

If you are looking to build a financial model for your business, schedule a one-on-one meeting with us to get the skill to stand out in the competition.