Financial models make up the backbone of many organizations’ financial decisions. As such, it is important to ensure they are accurate and up-to-date. Unfortunately, this isn’t always a simple task, as business conditions, regulations, and assumptions can change rapidly.

Updating a financial model involves understanding the changes to the data and assumptions, analyzing their impact on the model’s results, and making revisions as necessary. In this guide, we’ll discuss the frequency, process, and challenges of updating your financial models.

How Often Should You Update Your Financial Models?

There’s no one-size-fits-all answer to this question, as it depends on the type of model and the frequency at which data and assumptions change. Generally speaking, financial models should be updated at least once a year to ensure they remain relevant. If your model’s assumptions or data inputs change frequently, you may want to update it more often. The frequency may also differ based on the type of financial model.

Budgeting Models

These models are made to help organizations anticipate and plan for upcoming changes in the financial landscape. You should update them as often as the data and assumptions change—generally monthly or quarterly.

Forecasting Models

These models help predict future events, such as:

• Company or industry performance
• Economic trends
• Revenue and expenses

Ideally, you must update these models periodically to keep up with the changing trends and conditions. Annual, quarterly, and even monthly updates are recommended for companies to remain competitive in the market.

Fundraising Models

If you’ve created a financial model to pitch to potential investors, you’ll need to update it regularly. This is especially true if your company’s performance or industry trends have changed significantly since the initial model was created.

A well-designed fundraising model should include detailed financials, such as current and projected income statements, balance sheets, cash flow projections, and other key metrics. It should also include a detailed description of the company’s products, market size, competitive landscape, and pricing strategy.

Since these components are dynamic, you may have to update your models every few months or more frequently.

Process of Updating Your Financial Models

Whether you update a model quarterly or annually, it’s important to follow a set procedure. Here are the steps you should follow.

Step 1: Gather Data

Before you can make any updates, you need to collect the most current financial data. It includes:

• Income statements
• Balance sheets
• Cash flow statements
• Competitor financials
• Industry reports

Get the data that has changed since the last update. For example, if you’re updating a quarterly model, you need the last three quarters of financial information.

Step 2: Gather Assumptions

Every financial model has assumptions. They can be anything from revenue growth to tax rates. Gather the assumptions you need to update the model. These should be realistic and in line with your company’s objectives.

Suppose you’re creating a budgeting financial model. Your assumptions could be:

• Revenue growth rate: 5%
• Cost of goods sold (COGS): 60%
• Operating expenses: 25%
• Tax rate: 20%

Step 3: Check Logic

Confirm that the formulas and assumptions you input into your model are accurate. Double-check the information to ensure accuracy. All formulas should be error-free, and all linked cells should be updated properly.

Step 4: Review Outputs

Once you’ve updated your model, review the outputs. Check for inconsistencies and errors. If you find any, go back to step three and ensure your logic is accurate. 

Step 5: Refine the Model

Depending on the timing of your update, you may need to refine the model. For example, if you’re updating an annual model, you could add additional features such as sensitivity analysis.

Step 6: Document Changes

Documenting your changes is important to ensure you don’t forget why you did something. It also helps other users better understand your model.

Step 7: Schedule the Next Update

When would you like to update your financial model next? Schedule the date in advance and create a checklist of all the items you need to do. You can also assign a person to be in charge of the update.

Challenges In Updating Financial Models

It doesn’t stop at creating a financial model. Once a financial model has been built, it must be kept up to date as the underlying business changes. However, many organizations experience several challenges in this regard.

Expansions and Restructuring

When a business expands, its financial model must change to reflect the new scale. In addition, when a business restructures itself (e.g., merging with another company), its financial model must also be updated.

However, this is easier said than done. Changes to the business must be accurately analyzed and incorporated into the model, which takes time and resources.

Unforeseen Market Changes

Financial models can suffer from inaccurate assumptions. Suppose a business doesn’t have the foresight to anticipate major market conditions and adjust its assumptions accordingly. In that case, its financial models may be obsolete by the time they are put into practice.

In addition, when market conditions change rapidly and unexpectedly, businesses may not have the resources necessary to update their financial models in a timely manner.

Insufficient Resources

Financial models are often complex and require a large amount of data to create. Startups may lack the resources—such as personnel, infrastructure, or financial capital—needed to create and maintain these models.

What’s the Solution?

How can startups overcome these challenges? The best solution is to work with a professional financial modeling solution, such as Numberly.

The absence of required expertise means many startups struggle to build a financial model that tells their story to the investors. At Numberly, we help you eliminate this hassle by creating financial models tailored to your business.

By using dynamic assumptions, we can develop financial models that accurately reflect the current state of your business and are ready for real-time updates. It allows you to make informed decisions, track performance, and adjust your business plans accordingly.

Most importantly, our models do not include unnecessary complications. Instead, they provide clear insights into the key drivers of success, empowering you to make data-driven decisions and present your story to investors confidently. Schedule a call with us today.