Financial Modelling – Monitoring Your Business' Vital Signs

Financial modelling, also called cash flow management or cash flow visualization, is the process of gathering all the relevant financial and business information to build an accurate picture of your current financial status – including cash flow.

With a current realistic foundation, businesses and accountants can choose to model out a historical perspective – especially useful in sales and certain manufacturing industries; however, the real value is in a present day, easy-to-update ‘living’ scenario that can be extrapolated forward to test strategies and hypothetical scenarios.

What are the Benefits to Financial Modelling?

Here’s our latest short article in our series where we discuss another key term that the Dryrun team often hears in conversations. Not surprising, considering our passion to help business owners and accountants connect through cloud tools, that it totally makes sense that we hear about ‘financial modelling’ from time to time, but when we talk with people outside the team, we’ve realized that it’s a term that has a lot of different meaning to different people. By clearing up the definition, we pave the way to discuss the real issue at hand - the benefits of using software to build a financial model that is effective for your business.

What Makes Financial Models Useful?

As a businessperson or accountant you may think that building a financial model is an exercise in creating unnecessary busywork instead of focusing on core aspects of your business or your sales pipeline, however nothing can be further from the truth. Without a fundamental understanding of your financial ‘vitals signs’, you have difficulty understanding risks and opportunities which hobbles your strategic ability to plan for growth within your organization or within your industry.

Modelling allows you to keep a finger on the pulse of your business, including your one-time and repeating payables and receivables, your cash flow as a separate but important process, and your sales pipeline. The real trick here is to find a tool or tools that make data inputs and visualizations easy so that you’re able to fine-tune, update and be briefed on all your key information so that you’re ready to make day-to-day strategic decisions.

Which Business Stages Benefit From Financial Modelling

There is no timeline in place for engaging in such a high value activity as building a model of your finances, although like anything worthwhile, there is both an up-front and ongoing time commitment to build and maintain your model. Each business grows and develops through a number of phases, called the business lifecycle. Tools and software that help you model are valuable at each stage as you adapt your strategy to fuel growth and manage risk.

Entrepreneur lays out the following stages succinctly:

Seed and Development: With your company at the concept stage, evaluating the viability of your business idea and strategic approach requires an evidence-based approach to what your financials will probably look like. Vet your model with friends, family, mentors and industry personnel to have them poke holes in your plan. Having a visual representation of how you’re going to budget your dollars and cents is extremely helpful in conveying your ideas.

Business Startup: Launch mistakes can impact a company for years; fully 25% of start ups don't last 5 years. Knowing how and where to spend your capital to fuel careful growth while refining your product is a key concern – avoid pitfalls and check your intuition by making a map of your financials and forecasting into the near- and mid-term future.

Business Growth And Establishment: With a constant source of income and a full sales pipeline, stay the course of checking in with your financials on the daily. With careful forecasting and management, profit should improve at a steady pace. Establishment sometimes means hiring new staff as the business scales - ensure your financial models also scale to stay useful and not cumbersome. Dial up cash flow by modelling your ideal sales pipeline then working toward those goals.

Expansion: With a clear industry presence, experiencing growth in revenue and cash flow shows you’ve hit this stage of the business lifecycle. A great financial modelling tool that is easily sharable with your management team will keep you from complacency or carelessness while continuing to maximize growth and revenue.

Maturity and Possible Exit: With stable profits, business owners should now evaluate the merits of expansion or exit. A robust plan with a fully documented history through the five stages will help point the way for the next round of strategy or increase the value if you choose to sell.

Startup Genome indicates that more than 90% of start up businesses fail, often due to foreseeable but ignored circumstances like managing cash flow.

How to Find the Best Financial Modelling Tool for Your Business

Forget spreadsheets. Past the concept stage of your business, you’ll need something with considerably more power under the hood, and the capabilities to display your current and forecasted financials in a clear and impactful way – to say nothing of an easy learning curve.

Look for the following features to pinpoint software that will serve your needs, instead of the other way ‘round:

• Top-notch live support and knowledge-base

 Cloud-based, no OS compatibility issues, easy collaboration

 Ability to flexibly enter and toggle data streams like AP/AR, cash flow, budgeting and sales

 Integrations with other popular accounting and sales software

Want more definitions or information on how financial modelling is like fertilizer for your business? Try this for business owners: Picking the Right Financial Cloud Software for Your Business while accountants should consider: What are the Benefits of a Clear Roadmap and a Robustly Managed Plan for SMEs.

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