An effective financial model is critical in making decisions that impact the future of your business. It helps you determine your company’s value and its assets and compare this valuation to your competitors – so you can pivot and make adjustments as needed.
Tips for an Effective Business Financial Model
It’s Just Math – But Don’t Overlook It
A financial model is a mathematical representation of a financial situation, or in this case, the financial status of your business. It may sound daunting, but keeping your financial model up to date will assist you in several ways, including how to best:
- Negotiate transactions.
- Invest.
- Choose between a merger or an acquisition.
- Determine whether you need to raise more capital.
- Prioritize certain projects over others.
- Distribute your financial resources.
- Estimate your business growth, and
- Analyze risk management.
About Your Budget
Integral to your financial model is your annual operating budget. It provides a blueprint for your business spending and additional reassurance that you’re doing that spending in the right ways and at the right time. To create a business budget:
- Take a close look at all your income sources. Add them together to determine how much revenue comes into your business monthly.
- Subtract any fixed costs –rent, payroll, taxes, insurance, and others – from this amount.
- Define your variable expenses – equipment replacement, office supplies, and utilities, to name a few.
- Set aside a contingency fund for any unexpected costs.
- Create a profit and loss (P&L) statement by subtracting expenses from income.
- Reference your L&L to understand better any seasonal ups and downs, investments worth repeating, and the like.
The Importance of Sales Forecasting
Sales forecasting is based on past sales data, industry benchmarks, and economic trends. It helps you better manage your workforce, cash flow, and other resources affecting your revenue and sales. It can also help you set realistic financial goals and inform your investors of key developments.
Cash Flow Versus Profit
Another process to be aware of is cash flow analysis, which evaluates the money flowing in and out of your business. This is not the same as profit, the money you net after deducting your business expenses from overall revenue.
- Cash flow analysis helps you understand how much cash your company generates during a specific accounting period. It also provides an understanding of specific cash sources and an accurate picture of where your cash is going. A business may be profitable but still experience negative cash flow or vice versa: lose money and experience a positive cash flow.
Is Your Business Set Up for Success?
Find the accounting and financial talent and resources you need to plan, strategize and grow your business by partnering with Venteon Finance. Our recruiters bring extensive industry knowledge to your financial challenges and talent management needs. Reach out to us today to learn more.