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  • Writer's pictureBenjamin

๐—ง๐—ต๐—ฒ ๐—ฃ๐—ฒ๐—ฟ๐—ณ๐—ฒ๐—ฐ๐˜ ๐—™๐—ถ๐—ป๐—ฎ๐—ป๐—ฐ๐—ถ๐—ฎ๐—น ๐— ๐—ผ๐—ฑ๐—ฒ๐—น

Iโ€™ve seen beautiful financial models, so full of colors, charts, and diagrams... only to uncover wrong data and misleading conclusions.

Accurate financial models can be incredibly insightful for making long-term decisions, budgeting for scale, and safely testing ideas.

You have to decide the investment and value for your financial model. Here are some thoughts.

๐—–๐—ผ๐—ป๐˜€๐˜๐—ฟ๐˜‚๐—ฐ๐˜๐—ถ๐—ป๐—ด ๐˜๐—ต๐—ฒ ๐— ๐—ผ๐—ฑ๐—ฒ๐—น ๐Ÿ“ˆ

To build anything, you need a strong foundation.

๐˜š๐˜ต๐˜ข๐˜ณ๐˜ต ๐˜ธ๐˜ช๐˜ต๐˜ฉ ๐˜ˆ๐˜ค๐˜ค๐˜ถ๐˜ณ๐˜ข๐˜ค๐˜บ. A useful financial model depends on strong bookkeeping. Base expenses on known costs and expected increases. Ground sales forecasts in realistic experience.

๐˜๐˜ฏ๐˜ค๐˜ญ๐˜ถ๐˜ฅ๐˜ฆ ๐˜ด๐˜ฐ๐˜ฎ๐˜ฆ ๐˜Š๐˜ถ๐˜ด๐˜ฉ๐˜ช๐˜ฐ๐˜ฏ. To get the most value from a model, underestimate revenues and overestimate expenses. Also include a 5-10% contingency for unexpected circumstances.

๐˜‰๐˜ถ๐˜ช๐˜ญ๐˜ฅ ๐˜Š๐˜ฐ๐˜ฏ๐˜ด๐˜ฆ๐˜ฏ๐˜ด๐˜ถ๐˜ด. Share the model with leadership and team to get valuable feedback and to set expectations on budgets and results.

๐— ๐—ฎ๐—ป๐—ฎ๐—ด๐—ฒ๐—บ๐—ฒ๐—ป๐˜ ๐——๐—ถ๐˜€๐—ฐ๐˜‚๐˜€๐˜€๐—ถ๐—ผ๐—ป ๐Ÿ“ˆ

To inform decisions, here are some considerations:

ยท Evaluate spend in terms of investment. Think about how costs will impact revenues, save money or time later, and best help you grow.

ยท Transparency is valuable. Informed employees are more likely to be mindful of ways to increase revenues and reduce expenses.

ยท Build a model for you. While investors and other outsiders may demand the model, its primary purpose is for your planning.

๐—˜๐—บ๐—ฝ๐—น๐—ผ๐˜†๐—ฒ๐—ฒ ๐—”๐—น๐—ถ๐—ด๐—ป๐—บ๐—ฒ๐—ป๐˜ ๐Ÿ“ˆ

Share responsibility for success with the whole team.

๐˜š๐˜ถ๐˜จ๐˜จ๐˜ฆ๐˜ด๐˜ต๐˜ช๐˜ฐ๐˜ฏ๐˜ด. Ask employees for ways to improve and reward results by announcing wins and offering a one-time bonus for cost-cutting.

๐˜Œ๐˜ฏ๐˜จ๐˜ข๐˜จ๐˜ฆ๐˜ฎ๐˜ฆ๐˜ฏ๐˜ต. Require managers justify all expenses for each budget. Review existing software and services to ensure their necessity.

๐˜๐˜ข๐˜ญ๐˜ถ๐˜ฆ. Allow for drastically increasing a budget if the additional spend will show significant benefit or resiliency in the future.

๐—ฆ๐—ฐ๐—ฒ๐—ป๐—ฎ๐—ฟ๐—ถ๐—ผ ๐—ฃ๐—น๐—ฎ๐—ป๐—ป๐—ถ๐—ป๐—ด ๐Ÿ“ˆ

Start with the expected forecast and then build at least two more models based on expedited and reduced revenue growth.

"๐‘ฐ๐’ ๐’‘๐’“๐’†๐’‘๐’‚๐’“๐’Š๐’๐’ˆ ๐’‡๐’๐’“ ๐’ƒ๐’‚๐’•๐’•๐’๐’†, ๐‘ฐ ๐’‡๐’๐’–๐’๐’… ๐’•๐’‰๐’‚๐’• ๐’‘๐’๐’‚๐’๐’” ๐’‚๐’“๐’† ๐’–๐’”๐’†๐’๐’†๐’”๐’”, ๐’ƒ๐’–๐’• ๐’‘๐’๐’‚๐’๐’๐’Š๐’๐’ˆ ๐’Š๐’” ๐’Š๐’๐’…๐’Š๐’”๐’‘๐’†๐’๐’”๐’‚๐’ƒ๐’๐’†.โ€ โ€“ ๐‘ซ๐’˜๐’Š๐’ˆ๐’‰๐’• ๐‘ซ. ๐‘ฌ๐’Š๐’”๐’†๐’๐’‰๐’๐’˜๐’†๐’“

Use the scenarios to wrestle with inflection points and to prompt potential solutions earlier (e.g. adjusting head count as needed).

During stressful changes, itโ€™s tough to think objectively. This process urges you to consider options before the actual, hard choices.

The model should tell you what you need to know, not want to hear. Seek tough feedback both on the data and on the overall trends.

The power in tools comes from their quality. With financial models, make sure there is substance and not just aesthetics. ๐Ÿ“ˆ

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