CEO Wavelength
What Your Financial Model Says About Your Business.
Financial models may seem like fancy footwork for your finance team but, there’s a lot a model says about your business and, it is a critical business tool for business leaders. Here are some things to consider:
The Assumptions and Scenarios.
This is where the crux of your business lies. The assumptions and scenarios. How you intend to make money and spend money are both tied to what you assume will happen across a set of well thought-out possible scenarios. The caliber of the business assumptions and scenarios in your financial model will make or break the caliber of your financial model and - your overall business success because the magic is in the planning. As a business leader, you want to partner with your finance expert(s) in shaping assumptions and scenarios to establish a good foundation for your business trajectory. And, actively reviewing and challenging the assumptions and scenarios are a must.
The Audience.
Financial models are for more than one audience. Your leadership team. Your financing partners. Your potential buyers for when you start planning an exit. Many audiences. This means your model needs to be well set up so your business story resonates with a variety of audiences who will each have a specific perspective on what they need to understand in the model, and by extension, your business.
Common Bloopers.
Beyond shallow assumptions that don’t really get at the opportunities and challenges your business will face as it earns and spends money, there are also these big mistakes: making incorrect assumptions, ignoring cash flow, using outdated data, hard- coding a model (always good to have a direct feed of data to limit data entry issues and, for live updates), insufficient revenue streams (one revenue stream is usually not enough), and a lack of sufficient documentation. These errors have big consequences because they lead to inaccurate forecasts and poor decision-making. You want to solve the right problems, limit guesswork, make sure the balance sheet balances, etc. to navigate your business well into the future, with your financial model as the backbone for your business.
Who is Best to Design Your Financial Model? A Financial Expert Who Gets Your Business.
There are a lot of resources available to help build a financial model. But, the nuanced planning and analysis of your business really means that the person driving your business financial model must have the financial technical chops and, can really put their arms around your company’s business strategy to drive that through your financial model. It’s not a data-entry exercise. Using AI? Lots to consider here but, you’ll need a human to arrive at a financial model that serves as the blueprint for your company’s sustained success. Make sure you have the right expert.
