Modelling for the Future

“The future depends on what you do today.” ―Mahatma Gandhi

One of the most important pieces of information your trusted financial adviser can provide you is a financial model of your business. A good financial model will help you identify the future possibilities. It also will highlight the actions and constraints associated in achieving them.

There are many applications for financial models within a business, and each model designed to match its need. A financial model can add value through operational forecasting and during the acquisition or sale of a business.

Operational Forecasts

A model built for forecasting will capture the main activities of your business. It will forecast these activities out over several years. This model will then show the effect of operational changes on profit and cash flow very quickly. And allow comparison of different options. This could include changes like:

• Extending your trading hours
• Increasing your fees
• Changing your payment terms
• Bringing on a new product line or supplier

Being able to forecast your cash flow for these changes and business as normal can be a great benefit. It assists a business owner in ensuring there is enough cash to meet the needs of the business. And not over the next month or two, but for the next year and beyond.

In a growing business the ability to forecast for cash requirements is critical. When your business is looking to grow, it can fail simply as a result of not having access to funding.

It sounds counter intuitive for a business that is growing, and successful, to run out of money. When a business is growing it is increasing its sales. To do this there is an increase in the capacity to meet those sales. This often causes a need to increase the amount of working capital. The increase in working capital is a result of the time between paying suppliers, or employees, and the time customers pay for the good or service. Multiplied by the increase in the number of sales you make.

Modelling your planned growth will provide an estimate of short-term funding needs. It will then allow you to source these facilities early. The model will also give those providing funding an understanding of the use of the funds. And a greater level of confidence in providing access to those facilities.

Failing to plan for cash flows is a common reason for successful businesses fail.

Buying or Selling a Business

A term often used in valuing a business for sale is a "multiple" (often of profit). Each industry will have what is a common multiple to buy or sell a business at. These are generally a reflection of what the market has historically paid. They do not give an accurate valuation of the specific business that you might be looking to buy or sell.

Anyone buying or selling a business should have a model of that business. The model should contain a DCF (Discounted Cash Flow) and associated NPV (Net Present Value). This provides a more accurate understand the value of the business.

In better understanding the value of the business, you can better assess the asking price for the business. Giving you a better chance of a successful transaction.

Modelling the business can give you a sign of its value without having to put it on the market. Knowing your business’ value can be valuable information in itself.

Need a Model?

Do any of the circumstances above apply to your situation? Or do you have other impactful business decisions to make? Like buying a new premise or looking to operate overseas?

If you do, I would recommend speaking to your financial advisor. and with their help, ensuring you have a financial model at your disposal to aid your decision-making process. 

Justin Hogg is an Accountant that lifts fiscal performance for Businesses, Founders and Entrepreneurs. He strengthens the financial operations of a business, including creating and reviewing financial models.

To arrange an initial, complimentary discussion, email [email protected] or call 0414 896 696.