Financial Modeling: Understanding What’s Really Possible

How do you know what’s possible?

Without financial modeling, it is impossible to fully understand the potential for revenue growth and risk. Yet many business owners fail to embrace this important management activity.

Why? Because business owners are so close to their own operation, they tend to develop a somewhat constrained mindset about what is possible. This speaks to the old adage, “It’s hard to see the forest through the trees.” The very process of managing the day to day details of the business inherently compromises the capacity to see the bigger picture.

Another reason many business owners fail to embrace financial modeling is that they view the forecasting process as a more of an abstract exercise than a tool for testing assumptions. For a financial forecast to be truly useful, it must be generated from a separate table of assumptions. This allows you to easily change assumptions to learn how they will influence financial outcomes.

For example, if a sales commission rate is increased or decreased, how will it affect the bottom line? If a supplier goes out of business and you have to source parts from a competitor that charges more, what will it do to your cost of goods sold? If 60% of your consulting business comes from one client and that client decides to cancel the project, how fast and how much will it take you to replace this client with new business?

In addition to being able to test out different business scenarios, this form or professional financial modeling can be a useful tool for negotiating terms with investors and suppliers. Having a separate table of assumptions provides the level of transparency necessary to help others understand how you arrived at the projected bottom line performance. Collaborating with a professional CFO in the process also adds a level of credibility and conveys that you are looking at the bigger picture.

Did you know?

“…that you can discover how a part-time CFO could help your business through an initial no-cost, no-obligation consultation? Doesn’t it make sense that both parties would want to understand what the business issues are and where the synergies exist before committing to working together? It is from this shared perspective that controlling costs, reducing risk, driving growth, generating profits and increasing customer satisfaction becomes more attainable and rewarding.”

– See more at: http://www.buzgate.org/8.0/ny/ch_cfo_forecasting.html#sthash.WZU7cQjY.dpuf