Do Your Financial Models Look Like Swiss Cheese? Fix them now or pay the price

Your financial models are extremely important to the future of your company.  If you are a public company, errors can be devastating—just think about how analysts punish a company for missing earnings estimates.  Private companies also need to establish clear, realistic and sound financial models. A financial model is an essential part of staying on the growth path, illuminating your best options, and eliminating potentially costly mistakes.

Building a good financial model isn’t easy. Many companies spend countless hours trying to get their model just right. The purpose of building a model is two-fold: first it lets potential investors know that you have made an attempt to project the potential performance of your business, understand what the key drivers are and (hopefully) identify risks in the business model. Secondly, it helps you link strategic thinking to the nitty gritty of making enough money each month to pay your bills.

Sound financial models create the foundation of good long-term financial well-being. With them, you have visibility into your current financial standing, and an evolving working model for realizing your future financial goals. Financial models help you balance the demands of your short-term financial needs and wishes and long-term needs and wishes. The financial model is your “road map” to help your company get to its desired destination.  However, how can your business hope to succeed if the financial model is full of holes, inconsistent figures, unreliable assumptions, and market data that’s imaginary and wrong!

Not only will a good financial reporting system help add value to the company when it comes time to sell, but it will be a valuable tool in helping you stay profitable and competitive during the time you are running the company. It will identify the areas where costs may be getting out of hand or otherwise need improving, which is important in today’s challenging economy where cost containment is crucial.

There’s no one-size-fits-all model; your particular model would take into account the type of business you have, the products you sell, and who you compete with, among other things. It should also consider a variety of “what if” scenarios, like “What if transportation costs go from $100 to $200?” or “What if you only make $5 million in sales versus the $15 million you thought you’d make?”

Sound financial decisions depend on sound financial statements. It’s not enough anymore that you know how to calculate weighted average cost of capital, determine cash flow, or understand ratio analysis.  To be successful, you now need to know how to relay your company’s financial modeling and financial data to investors, gain insight into business financial statements of competitors, understand the financial model of your supplier, and more.

There are so many issues to consider when developing the financial model for your business and the documents that go with it. The best advice is to seek the help of a professional who can develop and build your financial reports with the skill and expertise of an expert.  Hiring an expert  will help you gain insights into your company in a way you never thought possible and overall, will help you become a better manager and/or owner.  The expert can help you learn about:

  • External analysis—competitors, customers and suppliers
  • Internal analysis—liquidity, cash flow and performance
  • Evaluating alternative analysis strategies
  • Integrating key metrics

There is too much to lose to wind up with financial reports that resemble Swiss cheese.  How many more holes can you hope to plug up and explain away?

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

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