What Is A Financial Model In Excel

 

While operating a business, you must ensure that you are efficient in decision-making when it comes to your finances. That’s what your ultimate goal should be. A financial model in excel can help you with this strategically. But what is a financial model, and how do you apply it to your business?

A financial model in excel is a way to create forecasts relating to your business finances over a particular time frame. It is highly effective and comes with a multitude of benefits for your business. So, before any further ado, let’s get started about all the details you need to know about a startup financial model.

Financial Model: The Basics

A financial model template is necessary for all kinds of businesses. It is made through spreadsheets while considering a specific range of historical data of your business. The data is added to an Excel file and then forecasted for the following months or years based on assumptions.

If you’re creating a startup financial model, then you might not have historical data to work with. However, using strong assumptions, you can create a financial model template that will help you estimate your future financial position.

Your business financial model template is there for you to forecast your overall business performance. Whether we talk about the profits, assets, liabilities, or cash flows, everything is covered through the financial model in excel.

The most basic form of a financial model template will cover all the basic financial statements of your business. It will include the forecasts for your income statement, balance sheet, and cash flow statement. But, to do this effectively, you will need the right service on board. You can create an impeccable financial model in excel using an experienced CFO service that can help you through.

Different Types Of Financial Models In Excel

When it comes to the number of financial models available, you will find that there are about three variations to it. Depending on your needs and the type of business you run, you can create either of the following financial models.

The first one is the 3 statement financial model. This is where it will include forecasts and assumptions for various financial statements. These include the income statement, balance sheet, and cash flow statement. The 3 statement model is the most basic type found as almost every business uses it.

Moving on, we have the discounted cash flow model (DCF), an extension of the previous version. The DCF model helps in the valuation of the business. It uses the Net present value (NPV) approach to identify how much your business is worth currently. With the assumptions and forecasts in place, you will also get to know the valuation of your business at a future date.

Next, we have the industry-specific financial model in excel. When it comes to creating such financial models, extreme skills are required. This is not an amateur’s job as a lot of details are needed about the particular industry to create a flawless financial model. Get a CFO on board to help you create this as they will have industry and financial knowledge, both!

What Do Financial Models Offer?

When it comes to a financial model in excel, they are the ultimate tools to help you make the right financial decisions. You get a clear depiction of how different decisions will lead to varying financial results. Therefore, you’ll be able to manage risk better, prevent losses, be consistent, and analyze your finances better.

Risk Management

Financial models help you in managing your risks. You will have a clear understanding of what various kinds of decision making will lead to. Therefore, you can avoid situations in which you know there will be adverse effects on finances.

Any changes in your administration or selling expenses, interest, or any other expenses will be reflected in your models. The majority of the models take into consideration the changes in price levels. So, you will know about rising expenses beforehand.

Prevention Of Losses

Almost every financial statement created is based on the principle of prudence. Since your historic data follows this pattern, your forecasted data will represent the same. Therefore, there will be no over-stating of income. Doing so will help give you a more realistic approach to your finances.

Moreover, you will be creating forecasts taking different assumptions, and then you can assess what expenses might arise over time. This can help ensure that you are ready to deal with such expenses and not have abnormal losses in the future years.

With a detailed and specific financial model in play, you can easily figure out which costs are irrelevant as well. Note that this isn’t easy to do, and you will need a chief financial officer to help guide you through it.

Consistency

With the use of financial models, you can create a consistent flow for your finances. While this doesn’t exactly work like a budget, it shows you what your decisions will result in. So, you will be able to follow through and create a financial position that is more consistent with your models.

Assessments And Analysis 

Your business financial model will be close to your actual performance in the future. It makes it easier for you to assess whether your business is growing according to plans or not. You will also be able to figure out whether there is a need to change your decisions about any particular aspect or not.

How Can You Use A Financial Model For Your Business

We have analyzed all the things that a financial model does for you. Now, how can you implement your financial model for your business?

Investor Pitch

The financial model for your business helps in determining where your business stands. This is essential for potential investors as they want to know your current and future plans. Your financial model can easily give investors a quick overview of your business’s value and where it will go in the future.

Creating a faux financial model to attract investors will never benefit you. Instead, you should come up with a way to create a stable financial ground for your business.

Business Model Simulations

Your financial model in excel is the ideal way to create different simulations. It can help you understand what various financial decisions will lead to in the future. Since financial models are mainly robust, you won’t need to make too many adjustments. You can quickly reach different results by changing a few variables here and there.

Growth Measure

With your financial model, you can easily figure out whether the actual performance is similar or close to the forecasted one. So, if you’ve seen potential growth in the future through your model, then does it hold for the actual performance? If it doesn’t, then what things do you need to change in the model or execution to get to the same growth level? These are a few things that you can figure out using your financial model.

Enhance Industry And Financial Knowledge

Creating a financial model is no easy task. It requires you to have in-depth knowledge of the industry and the financial-end. So, once you start creating a financial model, you will understand new metrics relating to your business industry and finances.

If you find yourself incapable of creating a financial model, then you should get a full-time CFO on board. They will help guide you better when it comes to financial knowledge about your business. Along with this, your financial model in excel will accurately forecast your business’ performance over the years.

Where To Get A Financial Model For Your Business? 

Hopefully, at the end of this, you have understood what is a financial model. Without this tool, you will find it difficult to analyze and forecast your future finances. Since your financial position plays a vital role in determining your growth, you must take every chance to improve it.

Your financial model in excel can aid you in coming up with decisions that will result in higher profitability and better cashflows. This is where Oak Business Consultant comes in. We have vast experience in providing businesses with effective financial models. Take a look at how our CFO service can help you with this highly technical and critical success factor!

We, at Oak Business Consultant, are specialized in providing consultation on these matters. Get the know-how about your business’ financial needs and learn how to make the most of them with our help. Visit our website Oak Business Consultant and get a free consultation.