Financial Modeling Powerful Tool For Your Small BusinessPosted on August 9th, 2019
Do you have a financial model for your startup or small business? Entrepreneurship is complicated and demanding, but there’s one step many entrepreneurs fail to take that can bring stability and predictability to an early-stage or small business. Whether applying for financing, planning inventory needs, or preparing for investment in new equipment, space, or personnel, having a sound financial model is vital.
Many startup and small business founders first encounter the need for a financial model when they are trying to raise capital to launch their business. But as any entrepreneur can tell you, businesses pivot and change quickly these days, so an updated financial model can be helpful to a company at any stage of its growth. In fact, a detailed financial model is just as important when considering a merger, acquisition, or initial public offering as it is when securing your first small business loan.
What is Financial Modeling?
As noted on The Balance, Entrepreneurs use financial modeling to forecast the performance of a business into the future. This process creates a mathematical model, typically in Excel, to represent a simplified version of a company that is based on historic records and reasonable projections. This can take one of several forms.
The simplest and most common form of financial model is the 3-Statement Model. Other types of financial modeling include the Discounted Cash Flow Model, used to value a company, and the Budget Model, which is helpful in creating your company’s budget. The 3-Statement Model includes an income statement, a balance sheet, and a cash flow statement. Linking these three documents together in a spreadsheet not only allows business owners to project what the future of their business might look like, but also to change different variables and see what the outcome is likely to be.
When building a business from the ground up, your 3-Statement Model may be based on projections for the future, including projected costs, income, and budget. Extensive market research is necessary to make sure that your projections are in line with the reality of what similar businesses are experiencing. If you’re creating a financial model as an established business, you will likely use a combination of market research, existing financial statements, and industry projections to forecast future profits or losses.
How to Use Financial Modeling
For PaySimple, business consultant Rachel Jimenez writes that â??Financial models are important because they help business owners make sound business decisions on a quantitative level. Before a major financial decision is made, multiple assumptions can be tested within the model to give the business owner an idea of best case and worst case scenarios. By establishing the most extreme outcomes, you can then prepare for any possible results along that spectrum.
A comprehensive financial model allows you to input different variables and test multiple scenarios. For example, if you expect an increase in prices from a supplier, you can use your financial model to determine the price adjustment that will allow you to maintain your bottom line. If knowledge is power, then financial models are one of the best power tools in your business toolkit, Jimenez says. Some business owners even enjoy playing with their financial model to see the impact of various decisions over the short and long term.
Creating Your Financial Model
There are many online guides that can help in the creation of your financial model, including at the Founder’s Institute and the U.S. Small Business Administration. However, most experts recommend seeking outside help as well to ensure that your financial model is realistic, comprehensive, and accurate.
If you’ve never built a financial model for your business or want to update an older model, e2E, LLC is here to help! Our team of subject matter experts in small business finance, management, accounting, and more is experienced in creating financial models for a wide range of startups and small businesses. With our expertise and a sound financial model, you’ll have access to a powerful tool that can help you plan for the future of your growing business.
Contact us today to learn more about our suite of small business services.