The main challenge of starting a new business is to make sure that you've enough money to meet all the obligations and challenges. To overcome this challenge- Financial Modeling enters! which come in the first few months. Entrepreneurs need to be more realistic and practically equipped about how long will it take the business to cover their costs and start earning the profit. Entrepreneurs must hold on to their all types of costs even before starting the business to ensure that they have adequate funds to fulfil their financial needs.
Managing the financial aspects plays a very vital role in the overall performance of the business but most of the Entrepreneurs today don’t have sufficient knowledge of how to navigate the finances & secure the funding to kick start their business in an efficient way, and hence the disaster happens. The main loophole in this system is that there is a limited amount of funding available to Entrepreneurs and also there are a few numbers of Investor in the market against the enormous number of ventures getting born every day and the unbearable truth is that the Investors can’t simply open their wallets for everyone walking through their door. The only start-up to secure the funding is the one who demonstrates their financial needs in the most appropriate manner. To remove this loophole in the system, the need for financial modelling emerged.
Financial Modeling is a summary of the Company’s performance based on certain variables that help in forecasting the future performance of the Business. In layman’s language, it means to “Forecast a business financial performance into the future”. Financial Modeling summarizes the Company’s performance by computing Company’s earnings and expenses in the form of a spreadsheet which helps in determining the impact of any future decision or an event. Thus, Financial Modeling helps an Entrepreneur by allowing them to understand that what their expenses are and what they really amount to and also ensure that they cover their cost and start earning the profit as soon as possible to avoid further complications in the course of Business.
Financial Modeling helps in analyzing all the expenses and earnings in the future course of Business by making the Revenue Model, The cash flow statement, the Profit and Loss Account, the Balance sheet, doing sensitivity analysis and much more.
After doing all the analysis and figuring out all the financial statements, one can easily know the value/ Net worth of Business. After knowing the value of Business and representing it in an appropriate manner, the start-up can easily get the funding.
When a financial model is built, it gives a future direction to any Business and thus it is very easy to get the funding because Investors not really rely on the idea of the business but its implication using the real-life model.
Financial modelling prepares the operational and financial models in a spreadsheet (for example - Excel, Google sheets) and hence avoiding traps and dead-ends that many Businesses falls into.
Financial Modeling bridges the gap between where your business stands and where it’ll be after a certain time (say, 5 years), therefore, after knowing the exact amount of fluctuations, you can alter your workings according to your goal and objective.
When you’ve everything ready beforehand, then it’s easy to evaluate the risk. After evaluating the risk on time, you can curb or minimize the risk to improve your decisions financially.
Financial Models helps in providing monthly assessments of projected (budgeted/planned) vs. the actual performance of the Company. This is the most crucial feedback for the business owners in order to make the adjustments easily.
Financial Modeling is dynamic in nature as it can be applied to any kind of Business activity in the same format or same way. Whether it’s a small business or a large Business, Financial Modeling helps it in the same way.
So, not only become the CEO of your business but also become the CFO!!!