A financial model is a representation of the company’s future performance. Use projections, assumptions and formulas to build a business model that calculates how your company will grow. A properly built model can help you communicate with lenders, investors and other stakeholders. This article will explain why a financial model is important and how we can help you build a strong foundation for your business.
1. Use a model as the blueprint to grow your company
In order to ensure that your company is growing in the right direction, it’s important to have a financial plan beyond the initial launch of the business. In fact, you should be setting up projections and tracking these numbers on an ongoing basis. This should include your revenue, costs and expenses, balance sheet items and other metrics that will determine the health of your company.
2. Use a model to get financing for future growth
When you’re applying for bank loans or venture capital, lenders will want to see not only what you’ve accomplished but also how you plan to grow the company. A financial model that projects growth and forecasts future performance can help you secure financing to achieve your vision.
3. Use a model as a communications tool
A strong financial model can be used as an effective communication tool with investors, lenders and business partners, among others. If you’re pitching for funding, it provides clear direction and guides your conversation away from opinions or potentially subjective forecasts. A model is also a good reality check against other projections, including those made by competitors in the same industry.
4. Use a model to measure performance against goals
A business plan should be more than just an idea on paper; each section should include specific targets you are looking to achieve. A model will help you measure performance against these goals and determine if changes need to be made. You should constantly review your numbers and make adjustments as needed to reflect your company’s current situation.
5. Use a model to maintain accountability
With proper documentation, you’ll have the ability to hold your employees accountable in their roles and responsibilities. A financial model can help you determine when there are variances in actual performance versus what was projected. You can then work with your department managers to adjust plans or make changes as needed before it negatively impacts your company’s health.