Measuring Progress in the Dark

Managing a business without financial modelling is like flying a plane without a GPS.

In this article, which is part of the ‘The Hidden Cost of Ignoring Financial Modelling’ series, we’ll explore the crucial role financial models play in monitoring KPIs and how not having them can hinder your ability to track your progress, using real-life case studies to illustrate our point.

As we have delved deeply in the “Financial Modelling: why your business needs it” article, one of the main benefits of having a Financial Model is the ability to compare actual performance with projected outcomes. This comparison offers invaluable insights into the effectiveness of business strategies and highlights areas that need attention.

For example, if a company projects a certain rate of revenue growth but falls short of the target, a financial model will enable management to identify that divergence early, and dig deeper to discover the underlying factors contributing to the shortfall, such as underperforming products, ineffective marketing strategies, or external market forces. This allows them to take corrective action sooner.

In contrast, businesses that overlook financial modelling find themselves in the dark when it comes to measuring progress. Without a structured framework to track performance against predefined metrics, they lack visibility of whether they are on track to meet their financial goals. This can lead to a false sense of security or complacency, as businesses may believe they are performing well without realising there are underlying issues.

To illustrate the consequences of ignoring financial models in measuring progress, let’s consider the case of Kroger Co. In 2018, this grocery store chain implemented a new loyalty program. While the program increased customer engagement, they lacked a proper financial model to track the program’s impact on sales and profitability. Without clear data on how the program affected key metrics like customer acquisition cost and average order value, Kroger struggled to determine if the program was truly successful or merely a costly luxury.

Similarly, Blue Apron, a meal kit delivery service, experienced financial difficulties stemming from its failure to implement robust financial modelling. Despite initial success and a high-profile IPO, Blue Apron struggled to retain customers and achieve profitability. The lack of a comprehensive financial model hindered Blue Apron’s ability to understand the consequences of not being able to accurately forecast demand, manage inventory, and control costs. This led to persistent losses and a decline in the company’s market value.

These two examples highlight that without a financial model in place, a business puts a lot at stake without even realising it. In the dynamic landscape of business, the cliché “You don’t know what you don’t know” in real life means “You don’t have a financial model”.

And, as we said, managing a business without one is like flying a plane without a GPS and flight plan. You risk getting way off course while you strongly believe things are progressing in cruise mode.

If you would like assistance in getting some financial modelling for your business, or to find out more about its benefits for your business, please contact us.

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