Corporate Advisory

Understanding Financial Modelling

“If people understood how beneficial financial modelling is, they would definitely want one for their business.”

Let’s look into financial modelling. As Neil Parker mentions in the opening statement, if you know what it is, then you’ll want it for your business. 

The winds of uncertainty are blowing strongly. The supply chain has been severely disrupted during the pandemic and cash has been pumped into higher inventory levels as business shifts from ‘just-in-time’ to ‘just-in-case’. 

Meanwhile, the cost of almost everything is going up. The cost of your inputs, including materials, energy, fuel, costs of labour and the cost of superannuation to name a few. Coupled with interest rates on the rise, costs that are contractually pegged to CPI increases (rent is a classic example) and payroll taxes payable on the increased wages and super – it’s easy to be spooked by it all

Financial modelling allows you to know exactly how much cost pressure you can sustain and what happens under different scenarios. In turn, this allows you to make good decisions sooner.

While you are looking at your business in isolation, what about your customers? Are they able to sustain the pressure? There’s a chance that they could go bust owing you money or simply retreat to their corner and stop spending money. Your suppliers could also be vulnerable. How will they act? Will they pass through cost pressures to you as their customer, will they survive and what if they don’t?

A financial model helps you to understand the factors that will impact you the most. Being able to see ahead allows you to be prepared. 

If you have a financial model in place, you can vary your assumptions and immediately see the impacts of those things. The impacts of not only one change to the business but three or four changes, occurring simultaneously can be assessed and at various points of time too. Knowing when and where things break down allows you to get ahead of the curve and make decisions accordingly. 

So, while you may look at the increases in costs and think that your business can sustain those increases, nothing beats being able to prove it.

If you haven’t got that clarity, it’s going to make it terribly difficult to make decisions and people will get quite anxious about it. 

What is financial modelling?

Financial modelling allows you to peek into the future. It’s the closest thing to a crystal ball you can get.

But it’s more than that, being dynamic, as opposed to something that’s only right as at a given point in time (at the time of preparation), the model is not only a glimpse into the future but a useful management tool too. 

Looking at your business’ performance versus its benchmark and/or budget on a month-to-month basis, over the financial year to detect departures from expected results early obviously facilitates earlier interventions. This reduces the likelihood that performance is allowed to drift for a quarter, a half or even a year.

It also allows you to take external counsel. Working with us to understand and assess which ‘levers’ to pull and which decisions are available to you, and assess the impact of pulling those levers or making those decisions. The business owner makes the right calls to improve areas of the business that are struggling based on logic, not guess work.   

What are the real warning bells for your particular business? 

These warning bells help you make decisions to keep your business sustainable. One example of how financial modelling works, regards the impacts of a price increase. If you were to increase prices by 10%, how many customers can you afford to lose before that becomes self-defeating? You can then make decisions based on assumptions and data if you have some financial modelling at your fingertips. 

What you don’t measure, you don’t manage

BridgePoint Group is a big believer in what you don’t measure you don’t manage. 

When working with clients we look at budgeting and forecasting for the next financial year. The benefit is that it provides a basis for decision-making, how the business should be performing and creates accountability to the result. 

If you’re 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. 

“The business manager that does engage in financial modelling suddenly sees the light! It is like driving with headlights on low-beam and you hit the high-beam and there’s a lot more clarity. Financial modelling simply allows for business decisions to be fact based and outputs measured and results collated.” Neil Parker BridgePoint Group MD.  

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

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