How can an effective financial model help me and my business?

In the last two articles I talked about what financial modelling is and how this is different to the kind of planning present in many business plan templates. Today I’m going to outline the practical side of how a financial model tool (and a Brixx model in particular!) can help bring clarity to business planning, as well as being a great asset in the long run.
The other thing I want to get across in these articles is that you don’t need to be an expert to do financial modelling. As with all things there’s a learning curve to be a good modeller. In the following bullets I’m going to delve into some of the specifics of what a model can provide. If you’re not financially savvy you might be thinking that modelling is not for you.
To which I would say – this is exactly why we made Brixx. One of the benefits of modelling in Brixx is that the way you build your model is reflected in the model’s outputs – bringing clarity to what might otherwise be the realm of accountancy. Seeing the structure of the model you have built in the model’s outputs really helps bridge the knowledge gap if you’re new to finance.
So how can financial modelling help with business planning? Let’s consider a few cases:
I want to understand which parts of the business are performing the best
A model will provide:
- Profit & loss forecast reports, split monthly, quarterly or yearly.
- Cash flow forecast reports, split monthly, quarterly or yearly.
- Drilldowns to see the makeup of each report line, based on the structure of your model.
- A cash-based Dashboard with a ‘spotlight’ to report on any area of the model, showing cash in, cash out, final cash and funding requirements.
I want to see how well my business could weather an economic downturn
A model will provide:
- Assumptions for inflation and bank savings rates which can be adjusted across multiple years.
- Adjustable tax rates to model future tax changes
- Adjustable NI rates and thresholds
- Simple switches to turn on or off parts of the model, allowing different scenarios to be tested.
- Every part of the model has a timeline which can be changed to move financial activities (loans, new projects, products, payments) forward or backwards in time.
I need to prepare forecasts to secure funding for a new project (or new business!)
A model will provide:
- Complete double-entry cash flow, income statement and balance sheet, with key lines drillable for further information.
- Model-wide and activity-specific cash terms, giving control over when payments are made and received.
- Dashboard clearly identifying year-on-year cash deficits and funding requirements.
- The project itself can be modelled, clearly laying out initial costs, operating costs and return on investment.
- Several versions of the project can run in a single model, allowing different scenarios to be easily tested.
Models are a lot easier to understand than spreadsheets. Inherently visual, a model’s outputs are great at showing the big picture while still containing a lot of granular detail beneath the surface. A history of accurate predictions based on one continuous model is the most reliable data a business can have on its future performance.
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