financial modeling 101, financial modeling basics, and best practices. what is financial modeling? planning for the future of your small business is an important part of success. financial modeling takes different shapes, but basically, it’s about plugging different numbers and scenarios into a formula very often on an excel sheet and seeing the effect they have.
a well-built financial model will help a business owner understand the costs and profits from their management decisions. what will it cost to open a new location, hire a new employee, and how does that impact the bottom line? these can even tell businesses they have enough customer service people to take on the number of customers they want to next year. that’s why using financial statements and market research will give you more accurate results. it’s even a good idea to consider a professional consultant to get an objective base to start from.
you can get a bunch of different scenarios by changing the variables which can be factors like the size of your target market, price per unit (which can even include extra selling costs like transportation) and estimated profit.
one of the best things about financial modeling is it’s always a work in progress. as time goes by and your small business conditions change, you’ll always have the ability to plug in new numbers to see what comes out. as you might imagine, there are a variety of financial models to choose from. however, there are a few that are considered standards:
three-statement model. this is one of the more basic ones that covers incomes statements, cash flow, and balance sheets.
discounted cash flow model. don’t let the name scare you off. this model builds on the previous one to value a company.
budget models. as the name implies, this is the model that’s used to put a budget together.
other models that small business should find helpful include a forecasting model and option pricing model that basically makes use of the calculator built into excel.