Why is financial modelling so important?

A fully integrated financial model is an essential business tool whether it is supporting a transaction, a turnaround or simply improving decision making.  In a nutshell, they help us provide future visibility based on what is known, or expected, today and are used to make key assessments of what needs to happen next. Particularly in the current environment, being able to adjust a forecast to take account of changes is incredibly helpful in that decision making process.

Absolutely key to any financial model is confidence.  Confidence that the key drivers of performance are reflected in the model.  Confidence that flexing the model for different scenarios drives appropriate outputs.  Confidence that the model is materially accurate, or if not, that steps are being taken to improve accuracy of the forecast.

All too often, we see models that are not driven off the key commercial inputs of the business.  Flexing for different scenarios then has less relevance.   In addition, we see models that are hardcoded or so overly complex or detailed that the drivers of the forecast are lost.  Adjustments may have been shoe-horned into the workings or while the model technically works, it is too difficult to follow.  None of which provides users with confidence.

Understanding variances to actuals is also critically important to being able to prove whether certain actions taken have resulted in the desired outcome and if not, why not.  Clearly management teams will want to demonstrate that their actions are having the desired effect.  As a forecast proves more accurate, businesses and their stakeholders have more confidence that the outputs of forecast are reflective of the future.

In recent months, we have supported several organisations undertaking either a transaction or a fundraising to build new integrated financial projections, improve or build-out existing models or to augment a P&L with a balance sheet and cash flow.  As a result, the financial models were able to drive confidence in the various processes in which they were engaged.

Here are some fundamental items to consider when preparing a financial model

  • Get the basics right – Does it add up? Does the balance sheet balance? Does cash on the balance sheet equal closing cash within the cash flow?
  • What are the key drivers of the business? - Are they identifiable and can they be easily flexed? Do they stack up with the strategy and are the building blocks of growth easily identifiable?
  • Who inputs into the forecast? - What operational information can be used to inform/input into the forecast? Who is accountable for delivery of the numbers? Are these reviewed regularly and those responsible held to account?
  • Missing items - Are corporation tax payments, dividends, CBILS or deferred VAT repayments, contingent liabilities or committed orders included?
  • Opening balance – Does the unwind of the opening balance sheet translate to cash as expected? Does the forecast support the short-term cash flow forecast and vice versa for the next three months?
  • Version control – keep a log of changes that are made and label versions as the model progresses.

 

 

To learn more about how Cortus Advisory Group can help you build or manage a financial model appropriate for your business please contact James Groot at jgroot@cortusadvisory.co.uk or Alex Ford at aford@cortusadvisory.co.uk