Just like a business model define the framework to analyze and capture value for the company, a Financial Model is a tangible replica of that business value. Financial model is a result of developing forecasts and projecting the company’s financial performance to describe the impact of its future decisions. A financial model provides critical insights for an informed decision, building upon its historical revenue, expenses and investment horizon for predicting financial health of the company.

  1. Projecting revenue, expenses, and cash flow: For sustainable business operations, it is essential to estimate a realistic trajectory of sales earnings, expenses and cash in hand. A financial model validates financial performance in the future and raise confidence in implementing the planned measures for ultimate success of the company.
  2. Evaluating investment opportunities: A wise investment always generates a profitable return over a period of time. A financial model is a pertinent tool to evaluate and arrive at financially viable investment opportunity for the investors, repaying well over the opportunity cost of the money invested in new projects or business ventures.
  3. Identifying potential risks & mitigation: Every business face risks; successful companies anticipate and plan mitigation before risk destabilize the business. Business savvy founders always use Financial Model as a risk management tool, by estimating financial values for different risk scenarios and business sensitivities, for an informed decision.
  4. Streamline fundraising process: An investor values any startup for its financial health, higher yet stable returns and a properly mitigated business plan. A purposeful financial model will clearly communicate all of the above by developing realistic financial performance and showcasing its growth potential for a valuation the business deserves.

A financial model is described as a decision-making framework, assessing the impact of change in strategy or business environment and arrive at a fair valuation of the company for the founders, investors and contribute towards the economic progress of the industry and nation.

Developing a financial model is an art of scenario planning, analytical skills and mathematical programming for an accurate assessment of business fundamentals. Steps involved are:

  1. Define the purpose of the model: Clearly define what is needed for the business and intended outcome of the financial model. Bucket out the information/ data required, and the information/ insights expected from the financial model.
  2. Decide the structure: Reflect upon and prioritize the parts of financial model that are to be put together or organized for a conclusive analysis. Let the business applicability decide the type of model (discounted cash flow, DCF), detail, and the layout.
  3. Gather data: Always focus on facts or numbers, which needs to be examined and considered for helping decision-making and gather relevant financial and non-financial data in electronic form: historical financials, industry parameters, and vital assumptions.
  4. Build the model: Develop clearly defined sections like dashboard, back end for storage and structure of the data, assumptions in numbers, before entering the relevant data – sales, cost, capital investments and balance sheet numbers. Then, build a fool-proof model using Excel or any other spreadsheet software.
  5. Validate the model: As financial model is the basis of investing millions of dollars in a business it must reassure investors and founders alike that it is a transparent and fully validated account of the business fundamentals. Ensure correctness of data, formulas and assumptions for arithmetically accurate model.
  6. Put model to good use: A validated financial model ensures confident decisions by projecting realistic performance of the company or investment for securing future financial health and sustainable business even in adverse scenarios. A useful tool to shape strategy, accurate budget, performance review, sensitive to business needs.
  7. Update the model: Enormous amount of data is generated, and unforeseen changes appear as time elapses. Hence, it is recommended to update the financial model on regular intervals to ensure its precision and significance.

The business community, financial services like banking, and investment professionals will vouch for the importance of financial model and the critical role it plays in smooth functioning of the financial markets worldwide and the economic growth of the founders, industries, nations and the world as a whole. Strong understanding of business finances, market research capabilities and expertise in modeling techniques make AlphaValley uniquely placed for a purposeful analysis and build a real-world financial model to steer your company to success.