Business

How is Financial Modelling Useful for Companies?

Many businesses use financial models almost every single day. A financial model is usually built and presented as a spreadsheet that displays data and predictions about a company’s finances.

Financial modelling is then based on the past performances of a company but also on assumptions that are made about its future. For a financial model to be useful and as accurate as possible, it should come hand in hand with an income statement, a cash flow statement, and a balance sheet, among other documents.

How is financial modelling useful? Let’s talk about a few reasons why companies might want to use this precious tool.

1. Financial modeling is useful to analyze a company’s finances.

Financial modelling is, above all, a financial tool. It can help a company analyze its financial position. Financial models can also be used externally, for example, to provide insightful data to the investors who could potentially be interested in a company.

Models are useful to predict cash flow and help a company know its true worth. A financial model is useful for someone interested in investing in the company or acquiring it. However, deciphering a financial model is a tricky process due to the large amounts of data involved. Those who have passed a financial modeling course are best-suited to analyze the data accurately.

The simple act of building financial models will help the owner of a company acquire a better understanding of their business processes, which could even help develop or improve them along the way.

2. Financial modeling finds the right start-up funding strategy.

Financial modelling can help business owners predict their cash flow to know when to invest in their facilities or borrow money to keep operating normally.

Cash flow prediction is even more important for a start-up company that might need capital. Since a start-up is a young company, the team can’t rely on their past performances to build their financial models. Instead, they have to focus on making assumptions and forecasting their financial future. This process can help them find the right funding strategy to meet their needs and to allow them to move forward.

3. Financial modeling helps executives make important decisions.

The top-level executives of a growing company have many important decisions to make. Should they try to enter a new market, perhaps even in another country? Should they acquire another company or consider a merger? These decisions can have huge impacts on a company and should not be taken lightly.

Fortunately, financial modelling can help the people in charge make the best decision possible for their company. The financial models will show them the possible impacts of each choice. Of course, even financial modelling experts can’t know the future. But their predictions, even if they are not fully accurate, can still be useful and insightful.

4. Financial modeling allows companies to test different strategies.

To see the possible impacts of an upcoming change on the finances of a company, it’s possible to build more than one financial model at a time. This process can also allow a company to test different strategies before implementing one.

Analyzing financial models is less risky than trying a strategy without knowing whether it will work out as expected or not. Therefore, financial modelling is extremely useful for making projections while figuring out the best way to undertake a new challenge. Relying on models reduces risk and can help save a lot of time and money at the same time.

5. Financial modeling predicts what the future holds.

Since financial modelling makes it possible to forecast the future, it helps companies anticipate different things. Financial models could help predict a problem faced by the finance department, the failure of a merger, an issue with the supply chain, or an important need that will have to be fulfilled in the future.

Financial modelling can’t show us exactly what will happen in the future, but it can give us a good idea of what could happen. This precious insight can help entrepreneurs find clever ways to solve problems before they occur or predict a need for extra capital for a new project, for example.

You cannot do financial modelling right after simply reading about it. Any professional can enrol in a course that shows how to build financial models, but truly learning how to do it will require a lot of practice. With the right learning resources and enough practice and patience, you should turn a spreadsheet into a powerful tool that will help any company understand itself and its processes much better.

You Might Also Like