A financial model uses numbers to represent a company’s operations in the past, present, and forecasted future. They are not only used by lenders but also by company executives who are considering new projects.
If your business is large enough to need a business plan, you should learn how to complete this component of the report. Here are tips on how to do it.
Note that models are typically customized for a company’s goals, size, maturity, as well as other factors. Start-up businesses can use the following tips:
Determine the model’s goal. This will guide the complexity of the financial model. In fact, it doesn’t need to be too complex if you only want a quick estimate. Meanwhile, for a detailed report of cash flow, make it complex.
Get a template or hire a company to make your financial model. Either way, you won’t be shooting in the dark when it comes to what to include or how to include it.
Determine your company’s KPIs. The KPIs, or Key Performance Indicators, are the factors you’ve chosen to measure performance, whether of your entire company, a specific project, or even individual employees. Whatever you choose as a KPI should be concrete and easy to state in numbers.
Start with actual results from the past and present. This helps to improve forecast accuracy.
Do the forecast. Consider driving factors when predicting your financial future.
Predict future employee count. Labor is often the biggest expense for a startup, so be sure to factor it into your projections.
Model your working capital. When money should be going in or out of your accounts is important for a startup. Be sure to model it.
Review your financial model. Practice checking things over and make sure not to overlook any errors.
If you would prefer to have a professional create your comprehensive financial model, just contact us. We’re a CPA firm that can take care of all of your financial reporting needs.
Tax Tips for the Self-Employed – Foster Financial
Analyzing the Cost vs. Benefits of Business Expenses
Strategies for Optimizing Your Investments