Bottom-Line Financial Model

This model helps you connect daily operations with financial figures, ensuring operational profitability is monitored every day instead of waiting for month-end closures.

First, a quick apology to the financial sector: this model, based on hands-on experience, likely breaks several conventional rules, which is why it’s called the “Bottom-Line Financial Model.” It’s not meant to replace traditional financial tools.

Now, let’s get down to business.

Company numbers are typically organized to meet accounting standards that serve valuable and specific purposes, essential for the company's continuity.

However, operations require the same numbers but arranged differently to:

• Provide immediate, relevant information for daily operations.
• Reflect the direct relationship between operations and financial data.

Examples

With the Bottom-Line Financial Model: When a customer calls, you can instantly check their payment status from an operational perspective. You can assist them while directing them to the appropriate department if needed.

Without the Bottom-Line Model: A customer calls, and you assist them blindly because only the admin team knows the invoice status.

Another example:

Imagine you have 20 unpaid invoices.

With the Bottom-Line Model: During daily operations meetings, the invoices are front and centre, making it easy to establish a plan of action.

Without the Model: No one remembers the 20 invoices, some of which may not have even been issued yet.

Model Structure

This model is designed for service-based companies and includes four key monthly projections: Revenue, Expenses, Margin, and Cumulative Total.

It doesn’t include net profit, as this must be calculated by the administrative team, accounting for factors like depreciation, interest, and loans.

The Bottom-Line Financial Model focuses solely on operations. You’ll need a model for each business unit.

For each unit:

• In Revenue, include two categories: Projects and Recurring Services.
• In Expenses, include: Payroll, Unit Expenses, and Service-Related Costs.

Margin is the difference between revenue and expenses. Cumulative Total adds the current month’s margin to the previous month’s cumulative total.

Create a model for each unit and one consolidated version for the entire business.

Operational Metrics

The Bottom-Line Model connects operations and keeps indicators updated in near real-time since they’re practically self-calculating.

For example:

Operational Profitability: (Total Revenue – Total Expenses) / Total Revenue * 100.

You’ll also have the data to calculate metrics like recurrence factor, sales volume, and collection rate.

Complement these with daily operational indicators like fulfilment rates, number of extra tasks completed, and service mix.

For each indicator, define a minimum, maximum, and goal.

Example: Operational Profitability with a minimum of 20%, a maximum of 50% to remain competitive, and a goal of 40%.

Daily Use

As an owner, you’ll have an overview of the company’s performance and can quickly spot trends. If everything is on track, you can continue focusing on strategic matters.

If something seems off, you can drill down into the business units, identify the outlier, review its detailed Bottom-Line Financial Model, discuss with the manager, and provide support if needed. Otherwise, you return to strategic tasks.

For unit managers, the Bottom-Line Model offers a realistic view of their daily efforts and their impact on profitability. They can also review the model for each client.

This requires collaboration with the admin team, who updates the status of each transaction (e.g., marking invoices as paid).

The difference? Updating the Bottom-Line Model saves significant time preparing reports or sharing data with operations.

This immediate visibility is the power of the Bottom-Line Model.

Monthly Projections

An added benefit is the ability to project operational behaviour in the coming months.

For instance:

• When planning an investment, you’ll see its impact on margin and cumulative total, helping you decide the best time to proceed.
• When forecasting sales, you can strategize to strengthen the team handling new business and regulate the pace of growth.

The numbers are already there; you just need to organize them to enhance operations.

The Bottom-Line Financial Model helps you make the most of what you already have.

It’s easier to embrace your role as an owner when you have indicators linked to your company’s daily reality. Delegation also becomes smoother, supported by clear numbers with defined ranges and goals.

As always, dear owner, you have two options: fly blind or with data.

I’d be happy to discuss your Bottom-Line Financial Model with you.

Remember: Fly with Numbers!