Financial Growth Tips For Startups & Businesses
Financial modelling plays a crucial role in turning your innovative ideas into value driven profits. Let us first understand the concept of Financial modelling.
Financial modelling lays foundation for different mathematical models representing the performance of a financial asset or portfolio of a business, project or any other investments that you make. This concept is mostly applicable in the accounting or corporate finance applications where the financial parameters are closely monitored to take effective business decisions going forward.
The financial models that are built then project the future financial performance of the company or business and hence provide an estimate of the valuation of the company.
Here are some of the applications of Finance Modelling:
- Investment Banking: Financial Modelling is an all important tool of any investment banker. The company is valued by forecasting its revenue and financial statements. On the basis of evaluation, the banker can recommend the buyer or seller on taking informed decisions about investments or acquisitions.
- Equity Research: Financial Modelling allows analysts in evaluating organization’s financial projections, competitor’s projections and other market dynamics.
- Project Finance: Financial Modelling is very useful in assessing the financial feasibility of a project.
In short, Financial Modelling if done right can transform your valuable ideas into prolific profits just by having the right industry knowledge and expertise.
We have listed the following steps that can help businesses or organizations to turn their valuable ideas into profits via Financial Modelling
Define Your Business Model
The first step involves defining the business model that will allow you to make well informed and calculated business decisions. The business model can be defined on the basis of following factors:
– Historical Data of the past where you can see the trend of the historical business information. The legacy data provides a clear indication of you can approach your business going forward.
– Ratios and Metrics – It is important to calculate the historical ratios or metrics for the business such as margins, growth rates, asset turnover etc.
– Assumptions – Be a smart and proactive resource by predicting the assumptions about future growth prospects, growth rates which gives an indication of what future has in store.
– Forecast – The assumptions you have made earlier can be put to good use to forecast the financial statements as well.
– Business Goals and Objectives
– Operating Costs
The business model you choose involves so many pre-requisites that you need to fulfill. The costing, financial statements and your prediction analysis can help you choose the best business model that can map with your business goals and objectives.
So, choose your business model very wisely because it is the driving force for your business.
The ability to make smart and effective assumptions is equally important as defining a business model. You should be smart enough to make different financial assumptions that impact your business in some way or the other. Some of the common assumptions include:
– Future Growth Rates and Prospects
– Asset Turnover
– Cash Flow Statements
– Financial information
The assumptions you made go a long way in deciding the company’s growth and progress in near future.
Conduct Market Research to Validate Assumptions
Once the assumptions are made taking into account the financial scenarios and the expertise, it is time to validate those assumptions to make sure that you are on the right track of making progress. The best way to validate the assumptions is to conduct a market research and understand the current market dynamics. You just cannot rely on your instincts and knowledge and assume that your assumptions are near perfect. The market dynamics change quickly every single day, so conduct your market research to make sure that your assumptions and current market trends is align with your goals you have set.
Calculate your Start Up and Break Even Costs
Once you are done with the detailed market analysis and research, it is time to evaluate and assess your operating costs. Many companies don’t understand the importance of start up and break even costs and feel it is just another financial figure that can be neglected. Calculating the break even costs gain better insights into the pricing and sales goals. The business owner becomes aware of the total contribution of each product and service makes to the company’s overall profit. This is important as it helps businesses determine products and services that are not actually profitable and the company can then take decisions on the pricing part.
Finalizing Your Financial Model
Now comes the final part of finalizing the financial model once the financial parameters and operating costs are closely monitored and evaluated. There are different types of financial models which can be chosen based on the financial requirements and the nature of business.
Some of the commonly used financial models used in different domains are:
– Three Statement Model
– Discounted Cash Flow(DCF) Model
– Merger Model
– Initial Public Offering(IPO) Model
These models are used in different scenarios depending on the requirements that are encountered. For example, the DCF model values a company based on the Net Present Value (NPV) of the business cash flow. The three statement model derives its calculations from three predefined statements.
In order to build a financial model, you need a solid understanding of accounting fundamentals. Apart from the accounting knowledge here are some other pre-requisites which you need to fulfill:
– Sound Expertise of Current Market Trends
– In-Depth knowledge of financials and related information
– Sound Excel skills where excel formulas and functions are required to build a financial model
Features of a Good Financial Model
– Well-Structured with a good layout
– Easy to understand
– Focus on important pointers and issues
– Visual Outputs
To sum up things, we have provided a detailed overview about the need and benefits of Financial Modelling. If done right, can take your business to next level. So, with the right market knowledge and expertise you can transform your productive ideas into substantial success.