What Is Financial Modelling?Sadaf Abbas
Businesses of all kinds require financial modeling to ensure the tracking of their performance. Without the right financial model template, it becomes difficult to make the right decisions for your business. Here, we will help you understand what financial modeling is all about, along with how you can create the ultimate financial model in excel.
What Is Financial Modelling?
Here is the basic question that you must be asking- what is financial modeling? To help you understand this concept, you should know how important planning is. Financial modeling will help you figure out what your finances and business decisions will turn out to be. You will find forecasts of multiple time frames, depending on the need of the business.
It is an important tool that is required by businesses to forecast what their financial situation will look like. It proves to help business owners figure out which decisions will be more fruitful than the others. Through the use of assumptions and predictions, business owners will find themselves understanding various aspects that go into the business’s performance.
Generally, a financial model in excel will include at least the basic 3 statement model. Financial statements such as the income statement, balance sheet, and cash flow statement are covered. The forecasting of these financial statements helps you figure out the business valuation in the future.
What Do You Use Financial Modelling For?
Now that you have the basic idea of a financial model, let’s move on to what you can use it for. The reasons why any business owner creates a financial model revolve around similar things.
Measurement Of Growth
With a financial model template, business owners seek to verify how much their business will grow over time. The assumptions and forecasting will help them figure out the deviation between financial and actual growth. These will also help in analyzing how many changes the business needs to grow in reality.
The next thing business owners can do with a financial model is to assign a budget to their spending. Since the financial model template will help them assess where the expenses will reach in the future, you can easily work a budget around those figures. This way, you will have a set allocation of resources for a particular expense. Moreover, you can easily assess your financial position through this.
Another key reason why business owners use financial modeling is to measure the value of a business. By creating the forecasted financial statements and following the discounted factor model, you can figure out your business value. This is highly relevant for larger businesses and should be a common practice.
For anyone else to agree to an acquisition or sale of your business, you will have to provide sufficient details about your business. Your financial model in excel will easily be able to help you in this process. With all the relevant details on the valuation, making an acquisition or sale becomes easier for businesses.
Key Tips For Financial Modelling
Creating or building a financial model template is not an easy task. It requires the relevant knowledge and skills to make sure that you’re doing an accurate job. So, what are the best ways to go about financial modeling?
Using Excel For Your Financial Model Template
Now, you should be aware of some of the important tips for creating a financial model template. These include using all the tips and tricks that Excel has to offer. Learn most of the shortcuts on excel to make life easier for you. This way, you can easily navigate the platform while also making the relevant changes required.
Formatting Tips For Your Financial Model Template
The next thing that you should keep in mind is how you format your financial model in excel. Sometimes, you will have to make variations in color to differentiate between your model’s inputs and outputs. It will help you analyze your financial model template better. Adding color to cells can make a lot of difference, so use formatting for ease.
Creating A Layout For Your Financial Model Template
As you go about creating a financial model template, you will have to follow the right layout. Doing so is essential so that your workflows in a streamlined pattern. Otherwise, things can get confusing for you. Since financial models hold a lot of data, it is best always to have the layout planned.
Creating A Financial Model Template
When talking about financial modeling, we’ll also have to understand how to create a financial model in excel.
Starting With Historical Data And Assumptions
Before anything else, you will need to have historical data on your hands. What is this? It includes all the previous years’ financial data that can help you create forecasts. Why are these important? Well, you can easily see the patterns when it comes to changes in your financial position over time.
Income Statement And Balance Sheet
Moving on, as you get done with the assumptions and forecasting, you start filling in your financial statements. So, you use assumptions to forecast your financial statements such as the income statement and balance sheet.
Creating Schedules For Your Financial Model Template
When you create your financial model template, you will have to include the relevant expense schedules. For instance, to complete the forecast for your financial model in excel, you will require a depreciation schedule. But that is not all. You will also be required to create a loan amortization schedule and other finance costs schedules as you go.
Building The Cashflow Statement
Once you have your income statement, balance sheet, and schedules in place, you move on to creating the cash flow statement. This will ensure you know how much cash will be coming in and going out of your business. In this, you follow a method to reconcile your profits by adding back all the additional non-cash spending and reducing all the cash spending.
Valuation Of The Financial Model Template
As you get done with your cash flow statement, you get the cash flow for each year. Using this, you do the valuation for your business. This represents your business value in the market. All future cash flows are discounted back to the day of the initial outlay to showcase whether the business is profitable or not.
Sensitivity Analysis, Charts, And Graphs
Now, for the last bit, you’re required to do sensitivity analysis. What does this help you with? Well, you will easily be able to make changes within your assumptions to measure their impact. For this, your financial model in excel needs to be robust for the sensitivity analysis to work. Moreover, you can add charts and graphs to your financial model template as well.
How Do You Build A Financial Model Template?
You must be wondering who can help you create the ultimate financial model for your business. Essentially, you should have a chief finance officer heading the creation of the financial model in excel. Outsourcing a CFO is doable and gets the job done much better!
We, at Oak Business Consultant, are experienced in giving consultation on such matters. Our experience in creating financial models in excel and helping business owners is vast. You will find yourself in a position to make better decisions after availing of our services.