𝗧𝗵𝗲 𝗣𝗲𝗿𝗳𝗲𝗰𝘁 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗠𝗼𝗱𝗲𝗹
I’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.
𝗖𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗠𝗼𝗱𝗲𝗹 📈
To build anything, you need a strong foundation.
𝘚𝘵𝘢𝘳𝘵 𝘸𝘪𝘵𝘩 𝘈𝘤𝘤𝘶𝘳𝘢𝘤𝘺. A useful financial model depends on strong bookkeeping. Base expenses on known costs and expected increases. Ground sales forecasts in realistic experience.
𝘐𝘯𝘤𝘭𝘶𝘥𝘦 𝘴𝘰𝘮𝘦 𝘊𝘶𝘴𝘩𝘪𝘰𝘯. To get the most value from a model, underestimate revenues and overestimate expenses. Also include a 5-10% contingency for unexpected circumstances.
𝘉𝘶𝘪𝘭𝘥 𝘊𝘰𝘯𝘴𝘦𝘯𝘴𝘶𝘴. Share the model with leadership and team to get valuable feedback and to set expectations on budgets and results.
𝗠𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝗗𝗶𝘀𝗰𝘂𝘀𝘀𝗶𝗼𝗻 📈
To inform decisions, here are some considerations:
· Evaluate spend in terms of investment. Think about how costs will impact revenues, save money or time later, and best help you grow.
· Transparency is valuable. Informed employees are more likely to be mindful of ways to increase revenues and reduce expenses.
· Build a model for you. While investors and other outsiders may demand the model, its primary purpose is for your planning.
𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗲 𝗔𝗹𝗶𝗴𝗻𝗺𝗲𝗻𝘁 📈
Share responsibility for success with the whole team.
𝘚𝘶𝘨𝘨𝘦𝘴𝘵𝘪𝘰𝘯𝘴. Ask employees for ways to improve and reward results by announcing wins and offering a one-time bonus for cost-cutting.
𝘌𝘯𝘨𝘢𝘨𝘦𝘮𝘦𝘯𝘵. Require managers justify all expenses for each budget. Review existing software and services to ensure their necessity.
𝘝𝘢𝘭𝘶𝘦. Allow for drastically increasing a budget if the additional spend will show significant benefit or resiliency in the future.
𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 𝗣𝗹𝗮𝗻𝗻𝗶𝗻𝗴 📈
Start with the expected forecast and then build at least two more models based on expedited and reduced revenue growth.
"𝑰𝒏 𝒑𝒓𝒆𝒑𝒂𝒓𝒊𝒏𝒈 𝒇𝒐𝒓 𝒃𝒂𝒕𝒕𝒍𝒆, 𝑰 𝒇𝒐𝒖𝒏𝒅 𝒕𝒉𝒂𝒕 𝒑𝒍𝒂𝒏𝒔 𝒂𝒓𝒆 𝒖𝒔𝒆𝒍𝒆𝒔𝒔, 𝒃𝒖𝒕 𝒑𝒍𝒂𝒏𝒏𝒊𝒏𝒈 𝒊𝒔 𝒊𝒏𝒅𝒊𝒔𝒑𝒆𝒏𝒔𝒂𝒃𝒍𝒆.” – 𝑫𝒘𝒊𝒈𝒉𝒕 𝑫. 𝑬𝒊𝒔𝒆𝒏𝒉𝒐𝒘𝒆𝒓
Use the scenarios to wrestle with inflection points and to prompt potential solutions earlier (e.g. adjusting head count as needed).
During stressful changes, it’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. 📈