Financial Modeling for Companies

Introduction

Managing a business and making strategic decisions is an extremely difficult task for founders, directors or even investors to undertake. The difficulties arise from the uncertainty of future market conditions and the company’s reaction to internal and external changes.

Even though the experience and skills of the management are crucial factors for the success of the company, companies often build financial models and forecasting tools to minimise the risks as much as possible so that the management can plan ahead based on different possible scenarios.

In particular, financial models tailored to the company’s business model are becoming an integral part of most board meetings and investor discussions, as they can easily show a forecast for the company’s future and the appropriate actions to minimise losses and maximise returns.

Unique aspects of financial models for companies

Unlike other types of financial tools, financial models have the unique aspect of being able to predict the impact of business decision not only on the income statement but also on the balance sheet and cash flow statement. Financial models thus provide valuable insights even when a company is operating with a significant amount of deferred income and expenses.

Moreover, because companies can use their historical data as the basis for future forecasts, the output of a financial model is often more accurate than that of other instruments, making it a popular tool for financial analysts and companies looking for clear and precise information. By analysing historical data, it is possible, for example, to determine important key figures such as the average days sales outstanding or the average balance sheet structure.

Finally, because financial models are so comprehensive, they can also be used as a basis for further analysis of the company’s business. For example, it is possible to adjust them by adding more details and assumptions or simply use them as the “base scenario” for a sensitivity or scenario analysis.

For all these reasons, financial models have become the backbone of any business today. They support financial and strategic decisions and forecast their possible outcomes.

My financial modeling process

After many years as a financial modeler, I have developed and perfected my own 7-step process that ensures a high-quality result and ensures that all the goals set by the client are achieved.

My 7-Step financial modeling process includes:

1. Define the important reporting KPIs and the detail scope

The first step in building a financial model is sitting down with the client and understanding which are the important Key Performance Indicators (KPIs) that the model will have to track and how much detailed the model will have to be. Ultimately, the model is useful only if the client is satisfied, so setting clear targets is a must.

2. Understand the business model

The second step is understanding the business model. Because every company is intrinsically different from each other, there is no “universal” template for financial modeling that might be useful. On the other hand, understanding the company on a deeper level and building a tailored model ensure that success is achieved.

3. Collect related data and build the assumption sheet

As we briefly talked about before, collecting historical data is a fundamental activity to ensure that the forecasts and Key Performance Indicators (KPIs) are as precise as possible. Additionally, after the data is collected, it is important to build the assumption sheet, a financial document containing all necessary assumptions to make the model work.

4. Develop version 0.1

When building sensitive documents such as financial models, it is extremely important that not only the model is error-free, but also that it satisfies the client’s expectations. Therefore, it is a must to build a preliminary 0.1 “alpha” version to show the client.

5. Align, test and improve till Version 1.0 is achieved

Then, once the client has expressed their feedback about version 0.1, it is possible to align, test and improve until the final version, called 1.0, is achieved.

6. Build different scenarios

Because of the future’s unpredictability, it is always important to build different scenarios for the model. Especially for more complex business, it is possible to implement an add-on sensitivity and scenario analysis to ensure that the management has clear guidelines however the situation evolves.

7. Create a report or pitch

Finally, the last step is building a summary that can easily be shown to investors or non-financial managers which might be interested in understanding the forecast. This summary step can either be in the form of a written report or a pitch to be directly shown to the investors.

The financial model

After applying the 7-step process for creating a financial model, one obtains a financial model that is tailored to the company and can be used immediately as a guide for strategic decisions.

What makes my financial models special, however, is the fact that you can play with the different business factors to simulate specific situations while keeping track of changes in assets, liabilities, cash flows, net income and much more.

Also, since each financial model is tailor-made, you can decide how detailed you want each part of the model to be.

Related Analysis

Along with the full financial model, it is also possible to request other related analyses that can increase the usefulness of the model, either by broadening the scope, implementing different scenarios or calculating additional KPIs. The most common additional analyses implemented in a financial model are valuation models, fundraising models for expansion, sensitivity analyses and scenario analyses.

Valuation models are financial documents that determine the value of the entire company or a specific investment, taking into account future cash flows and other parameters and discounting them to today.

Fundraising models for expansion, on the other hand, are documents used in financial planning in cases where a company needs more funds to make an investment or expand its operations. Taking into account equity and debt financing, a fundraising model shows the best way to achieve the end goal.

A sensitivity analysis is a study in which one parameter or assumption in a financial model is changed at a time. A sensitivity analysis should also be done when a fundamental aspect of the business or market changes in the future.

Finally, a scenario analysis is performed by changing several parameters or assumptions of the financial model at the same time. Scenario analysis is often performed because a simple sensitivity analysis might be an oversimplification of the possible future changes.

My Services

Since different companies have different needs when it comes to financial modeling, I offer two different packages.

The first is usually aimed more at companies that already have experience with financial modeling or have some financial managers, because in this case the offer is only to create a customised financial model using my 7-step process.

The second offer, on the other hand, is more suitable for companies that are looking not only for a financial model, but also for a partner who can help them understand and apply the model, do research on previous data and projects, and also help them report and present the model to investors and directors.

Tailored Financial Model
Full set of financial statement
Personal video calls & online workshops

Video calls and exclusive support throughout the whole process
Coordinate with the team to collect relevant data and establishing assumptions
Deep level of details and a wide range of KPIs
Organised and professional presentation of the final results as a member of the team