In business, robust financials are a must and for a variety of reasons. It’s therefore important for any entrepreneurs, project owners or enterprise to fully understand what their value is.
What is the financial model?
It’s the process of creating a summary of a company’s expenses and earnings in the form of a spreadsheet, and an effective and efficient model is one that can help a company see and reach their future performance goals in various situations. In order for a financial model to function successfully, the numeric variables (how many, how much, how often) must be as accurate as possible.
Don’t complicate things! Key assumptions/projections and data should be easy to read and understand and be free of jargon. Make sure the financial model is flexible in the immediate term and adaptable in the long term as this will help to ensure a favourable outcome. In order to really get the most out of it for both the analysts and the business owners, simplicity is genius, and such a principle will ensure that the model is easier to navigate, check, and rely upon.
As more than one person will be working on the document, it’s imperative that everyone follows the same layout, keeping everything uniform. That may require some analysts to modify their own way of working, but it’s a small price to pay in order for there to be no confusion throughout the chain of people working on the document.
How can it be used?
Financial models are intended to be used as decision-making tools. Those operating and investing in a business can use it to estimate the valuation of a business or to compare businesses to their competitors in the industry, to decide on budgets, allocate corporate resources or to analyse and anticipate how a company’s stock performance might be affected by future events or executive decisions. Indeed, any factor that affects, or might affect company growth can be modelled, and a stock analyst is, ultimately, only interested in potential growth.
Why WGP insist on a robust financial model
Understanding the dynamics of businesses or products are critical to building assumptions. Data used to anchor forecasts must be simple, correct and easy to understand or else it will give misleading answers. Financial modes fail if they are too complex, cumbersome or clumsily put together.