Utilizing Financial Modelling for Strategy

Utilizing Financial Modelling for Strategy

Financial modelling is a process that uses financial data and assumptions to predict the potential impact of future events on a company’s performance. It doesn’t stop there, though, as good financial models also evaluate past decisions and their impact on the company’s performance. In short, financial modelling helps businesses understand their financial position and identify opportunities to reduce risk or increase profitability. These benefits aren’t just theoretical – they can have an extremely positive impact on your business. Financial modelling enables companies to make better strategic decisions by revealing hidden insights and risks in their business operations. Read on to learn how you can leverage the power of financial modelling for strategy in your own company.

What is Financial Modelling?

Financial modelling is the process of creating a financial forecast based on company data and assumptions. Financial modelling is closely related to financial forecasting and business modelling, but differs in that it uses real data to forecast the potential impact of future events on a company’s performance. Financial modelling can be used to make strategic decisions by revealing hidden insights and risks in a company’s business operations. Financial modelling is often done using a spreadsheet, although dedicated financial modelling software is also a common choice. Financial modelling is closely related to financial forecasting, but differs in that it uses real data to forecast the potential impact of future events on a company’s performance. Financial forecasting, on the other hand, does not use real data and is based on assumptions about future events. Business modelling is used to forecast the performance of an entire company, including financial performance, but is often done at a high level.

Build a Baseline Financial Model

The first step in building a financial model is to create a baseline financial model that reflects your company’s current financial state. The baseline model is based on real data and allows you to forecast the potential impact of future events on your business’s performance. The key to building a successful model is to use accurate data and assumptions. Make sure you have complete information about your company’s financial performance, including profit and loss, cash flow, and asset information. Assumptions are the backbone of a financial model, so make sure you understand the potential impact of these assumptions on your model.

Determine Key Drivers and Assumptions

After building a baseline model, you can use it to determine the key drivers and assumptions that will have the greatest impact on your model. These drivers and assumptions will then be used to forecast the potential impact of future events on your financial model. For example, if you’re modelling sales in your retail store, you may find that sales have an exponential relationship to the number of foot traffic in the store. This relationship is the key driver for sales and will be used to forecast sales for different foot traffic scenarios. Once you’ve identified the key drivers and assumptions, you can create a table to track them throughout the modelling process. This will make it easier to keep track of which data is being used in each portion of your model.

Estimate the Impact of Events

Once you’ve built a financial model and identified the key drivers and assumptions, you can use the model to forecast the potential impact of future events. These events may include new product launches, increased spending, a change in foot traffic, or any other event that may have an impact on your financial model. Modelling is a great way to test various outcomes and estimate the potential impact of future events on your company’s performance. Once you’ve identified the events that may have an impact, you can forecast the impact on revenue, expenses, and other key performance metrics. The model will help you identify any risks or areas of concern that you should address before the event occurs. It will also help you identify opportunities to take advantage of events and increase your profitability.

Evaluate Past Decisions

Building a financial model allows you to evaluate past decisions and their impact on your financial model. By tracking the data used in the model, you can easily compare the model’s performance with the actual data. Once you’ve established a baseline model and tracked the key drivers and assumptions, you can use the model to evaluate past decisions. A financial model will allow you to see what impact a certain decision had on your company’s performance, even if that decision was made outside of the model. For example, if you made a decision to purchase a piece of equipment last year, but added the cost to your company’s operating expenses instead of capital expenses, you can still see the impact by tracking the data used in the model. This will help you identify areas where you can improve your decision-making process and make better strategic decisions in the future. It will also help you identify areas where your financial model is incorrect or needs to be improved.

Conclusion

Financial modelling is one of the most powerful tools available to business leaders. Although it may seem like a daunting task, modelling is a straightforward process that can be completed in a short amount of time. Once you’ve built a model, you can use it to forecast the potential impact of future events, evaluate past decisions, and identify areas where you can improve your strategic decision-making process.