Many startup founders assume that financial modelling is just about picking up spreadsheets and plugging in numbers, but this couldn’t be further from the truth. Instead, this assignment requires a diverse range of financial modelling skills, including critical thinking, effective communications, and in-depth knowledge of financial markets, to be successful. In this article, we’ll talk about some of the most common financial modelling mistakes and explore the skills needed to excel at this valuable skill set.

Here are five common financial modelling misperceptions that you should know before creating your next model.

1. Every financial model is the same:

There is no one-size-fits-all formula regarding financial modelling skills– the type of model you create will be specific to your business and goals. In reality, most financial models are relatively dissimilar but at some point may be constructed by reusing components of previously constructed financial models. This is true even for diverse types of financial models, such as budgeting models, financial planning and analysis models, and project finance models.

Though financial models are specific to each business and within a business, you can utilise your previous model to build the new one but can not use the same one to apply it to the new business. Surely, there will be new differences to counter and one model can serve only one business. So, the misconception of thinning that all models are the same — NO, They are not!

2. Spreadsheets are dead

It’s no secret that now technology is taking over the financial modelling skills and landscape. But despite the rise of new platforms and software, spreadsheets are still very much alive and well. They’re often the best tool for the job, particularly for small businesses or startups financial modelling that doesn’t have the budget for expensive automated modelling software.

Spreadsheets allow you to control your models more, so you can tweak them to suit your specific needs. You can also easily keep track of changes as you make them, which helps avoid mistakes down the line. A great example would be forecasting an airline company’s revenues with a spreadsheet – all it takes is a few cells!

3. A qualification makes you a great modeller

Misperceptions of all time in financial modelling skills is that a qualification in finance or accounting makes you a great modeller. This is simply not true. A qualification might give you a strong foundation in finance or accounting, but it takes more than that to be a great modeller. You need to have an aptitude for numbers and an ability to think logically.

You also need to be able to understand and interpret financial data. An accountant without these skills will struggle to make sense of spreadsheets containing large data. It can be quite tempting when you first start modelling to put all your time into it.

4: One Model is enough

A financial model is never done. It is always a work in progress that should be revisited and updated as new information arises. The aim is to make a flexible model that accommodates new data and insights. If the assumptions underpinning the model change, the output will also change. And if a particular part of the model becomes obsolete, it can be replaced by something else without disturbing other parts of the analysis or changing their outputs.

Relying on one model is dangerous because it can lead to overfitting and give you a false sense of security. Financial models are meant to be used as tools, not gospel.

One of the key financial modelling skills is to keep testing your assumptions and run sensitivity analyses to see how robust your results are. Remember that models are simplifications of reality and will never be perfect. Don’t forget to include a margin of error in your analysis. Not thinking through all your assumptions might get you in trouble later on.

5: Financial models are Fire-and-Forget

Many entrepreneurs create a model during budgeting and never look at it again. Unfortunately, this turns the whole idea of your financial model into a meaningless spreadsheet only. Whereas a suitable business model is structured in such a manner that essential parts of the company’s finances may be altered in the future. This offers management a method for not just adjusting basic KPIs to reflect real-world experience but also a sandbox in which alternative situations and combinations may be explored to see what may happen to your firm.

A study by Richard Kimber explains that these are a few of the most common financial myths we face. And we comprehend. When you only want to market and discover whether you have anything worth selling, it’s difficult to commit time to learn and develop the proper structure for your firm.

When you have the proper tax structure, you may be able to make more tax-efficient decisions that save you money. From a decision-making aspect, it is vital to have the correct structure in place to make collective decisions with co-founders or co-owners equitably and legally.

Summary:

No model is 100 per cent perfect, no matter how much time and effort you put into it. The goal is to get as close to perfection as possible, but always remember that there is always room for improvement. There are a bunch of ways to improve a financial model: you can add more detail and expand the scope of your model. With the right knowledge and perseverance plus financial modelling skills, even small improvements can make a big difference in your financial model. Once you know what to look for, you can spot opportunities to improve your models before any errors are made.

Startup founders need to understand that the model’s predictions are not set in stone. Its a merely a model that can help you predict the future to make better decisions, not a guarantee. Many entrepreneurs are rightfully concerned about overpromising, but being too conservative is also bad – it’s best to flesh out what you reasonably anticipate will happen and back it up with uncertainty and reasoning. Institutional investors understand that reality and predictions will differ, and a strong model can be changed to reflect what is actually happening as your firm grows. Models serve this purpose; they are living records.

How to Select the Right Financial Modelling?

Having discussed the misconceptions and key financial modelling skills, now let’s give you a brief checklist on how to select the right financial model for your startup.

1) A one-size-fits-all approach is not the right way to go when modelling.

2) The goal of a financial model is to forecast outcomes or predict the future.

3) You cant produce accurate projections with limited data and knowledge.

4) It’s not easy to project values over ten years into the future.

5) Assuming your financial modelling skills are perfect. “My output will be accurate and reliable if my inputs are believable.” No! They are not.

Many people think they can just find a financial model online, copy it, and make a few changes here and there. Unfortunately, this is not the case. Just because you have a model does not mean you know how to use it or what inputs to change to get the desired results.

If you don’t understand finance basics, Numberly’s market experts can help you here. To get professional advice on financial modelling, get started with a free consultancy session.