How to build and derive value from Financial Model?

Just like a business model defines the framework to analyze and capture value for the company, a Financial Model is a tangible replica of that business value. The financial model is a result of developing forecasts and projecting the company’s financial performance to describe the impact of its future decisions. A financial model provides critical insights for an informed decision, building upon its historical revenue, expenses, and investment horizon for predicting the financial health of the company. Projecting revenue, expenses, and cash flow: For sustainable business operations, it is essential to estimate a realistic trajectory of sales earnings, expenses, and cash in hand. A financial model validates financial performance in the future and raises confidence in implementing the planned measures for the ultimate success of the company. Evaluating investment opportunities: A wise investment always generates a profitable return over a period of time. A financial model is a pertinent tool to evaluate and arrive at financially viable investment opportunities for the investors, repaying well over the opportunity cost of the money invested in new projects or business ventures. Identifying potential risks & mitigation: Every business face risks; successful companies anticipate and plan mitigation before risk destabilizes the business. Business savvy founders always use Financial Model as a risk management tool, by estimating financial values for different risk scenarios and business sensitivities, for an informed decision. Streamline fundraising process: An investor values any startup for its financial health, higher yet stable returns, and a properly mitigated business plan. A purposeful financial model will clearly communicate all of the above by developing realistic financial performance and showcasing its growth potential for a valuation the business deserves. A financial model is described as a decision-making framework, assessing the impact of change in strategy or business environment and arriving at a fair valuation of the company for the founders, and investors and contributing towards the economic progress of the industry and nation. Developing a financial model is an art of scenario planning, analytical skills, and mathematical programming for an accurate assessment of business fundamentals. The steps involved are: Define the purpose of the model: Clearly define what is needed for the business and the intended outcome of the financial model. Bucket out the information/ data required, and the information/ insights expected from the financial model. Decide the structure: Reflect upon and prioritize the parts of the financial model that are to be put together or organized for a conclusive analysis. Let the business applicability decide the type of model (discounted cash flow, DCF), detail, and layout. Gather data: Always focus on facts or numbers, which need to be examined and considered for helping decision-making, and gather relevant financial and non-financial data in electronic form: historical financials, industry parameters, and vital assumptions. Build the model: Develop clearly defined sections like the dashboard, the back end for storage and structure of the data, and assumptions in numbers, before entering the relevant data – sales, cost, capital investments, and balance sheet numbers. Then, build a foolproof model using Excel or any other spreadsheet software. Validate the model: As the financial model is the basis of investing millions of dollars in a business it must reassure investors and founders alike that it is a transparent and fully validated account of the business fundamentals. Ensure the correctness of data, formulas, and assumptions for an arithmetically accurate model. Put model to good use: A validated financial model ensures confident decisions by projecting the realistic performance of the company or investment for securing future financial health and sustainable business even in adverse scenarios. A useful tool to shape strategy, accurate budget, performance review, sensitivity to business needs. Update the model: an enormous amount of data is generated, and unforeseen changes appear as time elapses. Hence, it is recommended to update the financial model at regular intervals to ensure it's precision and significance. The business community, financial services like banking, and investment professionals will vouch for the importance of the financial model and the critical role it plays in the smooth functioning of the financial markets worldwide and the economic growth of the founders, industries, nations, and the world as a whole.