Predicting exactly what is going to happen in the future isn't possible, but there are ways to be more confident about what could happen. Financial modelling aims to help with this. Its purpose is to break down a business's financial activity into different variables so that each one can be tested and potential outcomes can be explored. Small and medium businesses can benefit from financial modelling, which allows them to compare the outcomes of various actions and make better decisions.
What Is Financial Modelling?
Financial modelling is a type of forecasting that can be used by businesses of any size. The process is especially useful for small businesses because profit margins are often tight and accurate forecasting is important. A financial model is a forecasting tool that takes different scenarios and considers the possible outcomes in terms of your business's performance. Creating financial models is made easier with the use of a range of handy tools, such as Microsoft Excel and various accounting software options, which have a number of readily-available financial models.
Financial models are created using different assumptions, which are essentially informed predictions of how your business might perform. These assumptions are arrived at using evidence, such as your business data, industry data, and information about the market. By playing around with different assumptions and plugging them into your financial models, you can determine the most likely outcomes of different business decisions.
The Benefits of Financial Modelling for Small Businesses
Financial modelling has multiple benefits for small businesses. It can help to answer many different questions about how business decisions will affect the performance of your business and its finances. As well as being useful for your company's own internal use, it can also be useful as a fundraising tool. Preparing financial models for fundraising purposes enables your business to demonstrate the future potential of your business and present your business as an attractive investment opportunity.
Financial modelling gives your business the necessary information for owners, managers, and others to make better decisions. You can gain accurate financial forecasts, plan better for the future, and much more. Business owners use financial models to gain a better understanding of many actions and make decisions in a range of areas. They can be used to help work out how much startup capital you might need, to compare pricing models, to identify KPIs, and to forecast potential future expenses.
Financial modelling can't predict the future, but it can help to make things less certain. Businesses can be more prepared for anything that might happen because they have already considered how different events and changes could have an impact.
Types of Financial Models
There are many different financial models that can be used to examine a range of scenarios and determine various outcomes. Small businesses can often benefit from using plenty of market and industry data, especially when they are newer, as well as using data from the business itself. Different financial models can be applied in different situations to gain a better understanding of potential outcomes.
SMEs should use financial modelling for better financial forecasting. Your accountant can ensure you use financial models appropriately.
Get in touch for a free consultation if you would like to discuss financial modelling needs of your business.
Comments