Creating a credible financial model is a necessary exercise for most start-ups, especially those seeking investment.
While there’s no one way to create a sound financial model, there are some best practice steps you can follow. That’s why we have created a Good Practice Guide to help you build yours.
Why do you need a financial model?
Financial modelling is a mathematical representation of how your company works now, and how it will work in the future (and how much revenue you will generate as a result).
Most financial models are created within spreadsheets or specialist software, and they are used for a variety of different reasons, such as:
- Making an investment case to obtain funding
- Operational planning and forecasting (e.g. deciding which staff to hire and how much to pay them)
- Reporting to investors and banks
- Valuing a business
- Making acquisitions
You can also use your financial model to test the outcomes of different potential future events, e.g. an economic slowdown or a tax increase.
By analysing the results you gather through financial modelling, you can make informed decisions about how to manage these events and select the best path for your company.
Before you start building your company’s unique financial model, you must consider the purpose, the user and the audience for whom it will be designed. These three elements are key for creating accurate and actionable data.
How do you build a financial model?
There are many professionals that build financial models that you can apply to your business, or you can create your own.
Different models do different things, so you must make sure that your model will fit the purpose you need it for. If you are unsure of which model you need, conduct more research before starting.
There are several themes that should be considered throughout the building process and throughout use:
- Simplicity – Use a simple model, presentation and structure to improve understanding.
- Accuracy – Input the most accurate data for the clearest insight.
- Flexibility – Make sure your model can adapt to business changes (such as scaling, pivoting or investment).
- Realism – Have sensible and grounded assumptions to create more accurate forecasts.
- Consistency – Be consistent in presentation, structure and formatting for ease of use and understanding.
Good Practice Guide to financial modelling
If that’s got you thinking about creating your own financial modelling system, take a look at this handy infographic for more information.
By creating a financial model with these elements in mind, you will create an effective and actionable solution that will assist you during the decision making process. This will help your business achieve its growth and operational goals, as well as ensure you’re prepared for any unexpected events.
To find out how financial modelling could help your business, get in touch with KPMG TechGrowth today.