Financial Modelling: why your business needs it.

You may have heard of Financial Modelling, but you may not know exactly what it is or how it can benefit your business. In this article, we will explain what Financial Modelling means, how it works, and its benefits for any business, regardless of size or sector, illustrated with real-life case studies.

In this article:
• What is Financial Modelling and its benefits
• Financial Modelling vs Financial Forecasting
• Apps vs Professional Modellers: which one is better?
• Discover the BridgePoint Group Financial Modelling service
• Financial Modelling for Small Business – Case Studies

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First and foremost, what is Financial Modelling?

Financial Modelling is a powerful tool used by businesses to forecast future financial performance. Imagine having a crystal ball? You could make pretty good decisions, like which numbers to write on your Lotto ticket, right?!

Well, a financial model is a bit like that. It helps the decision makers of the business make informed decisions. At its core it involves creating mathematical representations, or models, of real-world financial situations. These models typically incorporate various financial data, assumptions, and formulas to simulate different scenarios and predict outcomes.

The primary objective of Financial Modelling is to provide insights into the potential financial implications of different business strategies, investment decisions, or economic changes. By manipulating input variables within the model, Business Owners, General Managers or CFOs can assess how different factors may impact key financial metrics such as revenue, expenses, profits, cash-flow, even your business valuation.

One example of the use of Financial Modelling is the case of Netflix. They use financial models to forecast their subscriber growth, revenue, costs, and cash flow. They also use Financial Modelling to adjust their pricing, content, marketing strategies, as well as to evaluate potential acquisitions and partnerships.

Another example is Tesla. They use financial models to estimate the impact on capital required based on their production capacity, demand, and sales. Their financial model also allows them to plan capital expenditures, to design R&D programs and to raise funds from investors and creditors, such as stock offerings and debt issuance.

As not every business has the size of a Tesla or a Netflix, let’s explore some more grounded aspects of how Financial Modelling can help a small business in any industry.

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What are the benefits of Financial Modelling?

In a nutshell, Financial Modelling can help businesses on four main fronts:

• Improving financial performance: Financial Modelling can help businesses monitor their financial performance and identify areas for improvement. By using financial models, businesses can track their revenue, expenses, cash flow, profitability, and other key financial indicators like valuation and conformance with bank covenants. Businesses that use financial models will make decisions earlier and with confidence, about the things that matter.
  
  
• Making informed decisions: Financial Modelling can help businesses make better decisions based on data and analysis. It can also support businesses evaluate the impact of different scenarios and options on their financial results. For example, financial models can help businesses decide whether it makes sense to raise capital, make acquisitions, grow organically, sell assets, or invest in new projects. and understand the relationships and dependencies between.
  
  
• Attracting investors and lenders: Financial Modelling can help businesses attract external funding from investors and demonstrate their financial viability and potential growth. Financial models can also help businesses communicate their plan and strategy to potential funders. Financial modelling helps demonstrate a level of financial sophistication that investors and lenders are looking for.
  
  
• Understanding your business better: Going through the process of building a financial model often helps Business Owners, General Managers and CFOs to understand their business at a whole new level. Being able to trace and understand dependencies and interdependencies – the levers you have available to change your outcomes and by how much is a powerful learning opportunity.

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Differences between Financial Modelling and Financial Forecasting.

Financial Forecasting is the process by which a company thinks about and prepares for the future. Forecasting involves determining the expectations of future results based on the current trends and conditions. It’s an essential function within business planning, budgeting, and operations management.

Financial Modelling is the process by which a company builds its financial representation based on the forecasts and other data. Modelling involves taking the forecast’s assumptions and calculating the numbers using a company’s financial statements. It is an analytical tool that enables you to evaluate the impact of different scenarios and the financial implications of those decisions.

Both processes (Forecasting and Modelling) are complementary functions that help a company make sound business decisions. While Financial Forecasting provides the basis for Financial Modelling, the latter provides the means for testing and validating the forecasts.

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Financial Modelling for Small Business.

Financial Modelling can be challenging for SMEs lacking the time, resources, or expertise to build and maintain their own financial models. And with the proliferation of Financial Modelling apps, SMEs may be tempted to bypass professional services, which is understandable.

Accessing a low-cost ‘crystal ball app’ that can help your business thrive sounds like a no-brainer decision. It’s appealing to any budget-conscious entrepreneur. However, while those apps offer convenience and affordability, they invariably fall short in the most crucial aspects of Financial Modelling. In other words, Financial Modelling apps have built-in limitations. They may be a waste of your time and/or give you false indicators.

You might be asking yourself, ‘If apps aren’t the best option, how can I find a good financial modeling service?’ Let’s delve into it.

Critical aspects of Financial Modelling

• Expertise and Experience: Professional financial modellers like BridgePoint Group possess specialised expertise and extensive experience in financial analysis and modelling. We understand the intricacies of different industries, regulatory requirements, and best practice. This depth of knowledge enables us to create customised models tailored to the unique needs and goals of each business.
  
  
• Accuracy and Reliability: Accuracy is paramount in Financial Modelling, as even minor errors can have significant consequences. BridgePoint Group uses advanced techniques and sophisticated algorithms to ensure the accuracy and reliability of our models. We also conduct thorough analysis, validate assumptions, and stress-test scenarios to identify potential risks and opportunities.
  
  
• Customisation and Flexibility: While online tools offer pre-built templates, they may be inflexible and may not accommodate the specific complexities of your business model. BridgePoint Group provides a high level of customisation and flexibility, allowing businesses to incorporate unique variables, metrics, and growth strategies into their models. This approach ensures that the model accurately reflects the business operations and objectives.
  
  
• Strategic Insights and Recommendations: Beyond just creating models, BridgePoint Group offer valuable strategic insights and recommendations based on deep financial analysis. We help businesses interpret data, identify KPIs, and formulate actionable strategies to optimise financial performance and mitigate risks. This guidance can be invaluable for businesses navigating uncertain economic conditions or pursuing growth opportunities.
  
  
• Long-Term Value: The value of a professional Financial Modelling service like ours outweighs any initial investment. A well-designed financial model can serve as a roadmap for success, guiding decision-making, securing financing, and attracting investors. All of our financial models are capable of being ‘dynamic’ (a fancy way of saying they can be kept up to date with live data, so they move with you). Additionally, we provide ongoing support and updates to ensure the relevance and effectiveness of the model as the business evolves.

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Discover BridgePoint Group Financial Modelling service.

The innovative methodology crafted by BridgePoint Group facilitates dependable, timely, and adaptable decisions in alignment with your business goals.

• Fast Turnarounds: We know that when you want a financial model built for the first time, it’s probably time sensitive. Our process has been guided by the notion that ‘sooner is better’. We can turn your model around fast!
  
  
• Dynamic Models: Our software talks to yours. This creates enormous efficiencies in the build process but more than that, allows you to drive value from the model for years to come – because it is always up to date. With powerful reporting capabilities, our models become a tool for ongoing decision-making, performance monitoring and management reporting based on the numbers.
  
  
• Links to Real Performance: A model predicts outcomes, based on a set of assumptions. On its own, that isn’t enough to move the dial on performance. That comes down to behaviour. Referencing your unique critical success factors, key performance indicators and hurdle rates of performance, a BridgePoint Group dynamic financial model can be used to create alignment and accountability, at a level of granularity that suits your needs.
  
  
• Reliable Support: When it’s all said and done, often you need to present the model to third parties – the Board, the Bank, the Investors, management. While you know your business better than anyone, we know the model. Your stakeholders want to trust the integrity of the model and how it converts data to information before they trust the output. Give yourself the time and space to perform your role, let us explain the model for you.

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Financial Modelling examples.

The best way to answer this question is by demonstrating Financial Modelling in action in small businesses. We’ve curated some of the most interesting case studies of Financial Modelling for Australia-based SMEs that are worth sharing. They provide clear outcomes and serve as proof points of the benefits of Financial Modelling for small business.

Case study 1: Financial Modelling on Retail

A five-year-old retail company faced tough competition and aimed to grow its market share and profitability. It utilised Financial Modelling to assess various strategies including new product launches, market expansion, increased marketing spend and improved customer retention. The model revealed potential outcomes:

• Launching eco-friendly products could boost revenue by 15% with a 10% rise in expenses;
• Entering the US market could increase revenue by 25% with a 20% hike in marketing spending;
• Increasing marketing spending by 10% could up customer retention by 5% but reduce cash flow by 5%.

The decisions based on these insights resulted in a 20% revenue surge, 15% profit increase, and 10% higher customer retention within a year.

Case study 2: Financial Modelling on Manufacturing

The manufacturer, renowned for its quality and reliability over a decade, faced rising demand and stricter quality standards. To meet these challenges, it needed upgraded equipment and facilities. Through Financial Modelling, it assessed various investment options and financing methods. The model made it clear that:

• Purchasing new equipment required a $10 million upfront cost but promised $2 million annual savings in maintenance.
• Leasing incurred $1 million yearly rental fees without upfront payment.
• Outsourcing could cut costs by 20% but compromise quality by 10%.

Using the financial model’s insights, the company opted to buy equipment, insource production, and finance via a bank loan. Within two years, this strategy boosted production capacity by 50%, enhanced quality by 20%, and reduced costs by 10%.

Case study 3: Financial Modelling on Services

A consulting and training services company, operating for three years with a network of experts, sought to address low and sporadic income by diversifying revenue streams and expanding its customer base.

Their Financial Model explored options like introducing new services, targeting different segments, partnering with other providers, and offering subscription plans. The model projected income, costs, cash flow, and profitability for each scenario.

• Launching web design services could yield $100,000 annually with $50,000 in costs.
• Targeting startups could bring in $200,000 but require $100,000 in marketing.
• Partnering in graphic design could generate $300,000, sharing 50% of profits.

Decisions were made based on these insights, leading to the adoption of new services, startup targeting, and graphic design partnership. These moves doubled income, diversified revenue streams by 50%, and increased the customer base by 100% in a year.

Case study 4: Financial Modelling on IT

The company, with innovative products, faced high development costs, necessitating funding. Financial Modelling aided in preparing business plans, pitch decks, and financial statements, showcasing value proposition, market potential, competitive edge, and financial performance.

For instance, it demonstrated customised, affordable solutions solving real customer problems and projected reaching 10 million users in five years with a 20% niche market share. Leveraging expertise, technology, and creativity for high-quality products was identified as a competitive advantage.

This model facilitated securing $5 million from angel investors, $10 million from venture capitalists, and $15 million from bank loans within a year.

Case study 5: Financial Modelling on NFP

Despite of its success in supporting disadvantaged communities, this NPF needed improve its impact. They used financial modelling to assess their current situation, identify challenges and opportunities, and plan future actions. The model helped them to measure their social return on investment, optimise resource allocation, monitor progress, and evaluate outcomes.

The model revealed their social impact: helping 100,000 people with education, health, and income. It allocated 80% to direct services, 10% to admin, and 10% to fundraising. Financially, it aimed to boost service delivery by 20%, donors by 10%, and volunteers by 5% annually.

Financial Modelling helped this NFP to enhance its impact based on the model’s guidance. They were able to improve the education level by 50%, the health status by 40% and the income level by 30% of its beneficiaries within five years.

These are some real-life Financial Modelling examples for small business across sectors. They’ve aided SMEs to achieve goals, showing Financial Modeling’s value in strategic decision-making for managing risks and seizing opportunities.

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BridgePoint Group Financial Modelling service.

If you’re still not convinced of the benefits of Financial Modelling then take it from us, it works. We use it in our business, and we wouldn’t be without it.

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.