Recommendations for creating a convenient financial model
Posted: Sun Dec 22, 2024 10:53 am
Experience shows that it is most convenient to use a financial model of production or a company that meets the following requirements:
All rows and columns are labeled - this will allow any user to quickly understand which indicators a particular block is dedicated to.
Get clients from the site every month
In a guaranteed volume
Read more
The calculation unit is designed . In philippine country code most cases, external users only need to familiarize themselves with the input and output blocks. However, when issuing loans, long-term financing, and in a number of other cases, they may need to clarify how the business was able to achieve the specified figures. Here, the calculation block will provide the largest amount of information. This means that all data must be signed in it.
All units of measurement are indicated - this should be done at least in cases where there is a possibility of doubt.
3-4 digit numbers are used . Anything else will be distracting. Format the cells - there is no point in changing the values manually or resorting to formulas.
Blocks are visually separated from each other by headers, important lines are highlighted in color. Table display styles will help to achieve the desired effect.
There is no maximum accuracy in calculating the indicators . The financial model does not aim to perfectly capture reality. If necessary, you can improve the accuracy of the calculations later.
Complex formulas are not used , because the simpler they are, the easier it is to read the tables and explain the values.
Download a useful document on the topic:
Checklist: How to Achieve Your Goals in Negotiations with Clients
Analysis of the resulting financial model
Once you have prepared your financial model, it is time to start using it. Choose different assumptions to identify risks and envisage several possible scenarios.
Most often, this tool is used for sensitivity analysis, in which each assumption is changed by 1 or 10%. This reveals the change in cash flow / IRR / NPV. The greater the change in the resulting indicator, the higher the sensitivity of the financial model to a specific factor.
Let's say that a 10% price increase resulted in a 20% increase in total cash flow, and a 10% decrease in variable costs resulted in a 5% increase. This means that the sensitivity of the model to price is 2, and for variable costs it is 0.5. Based on this, when preparing a business plan and running your business, you should pay as much attention as possible to the factors to which the model reacts most acutely.
Financial Model Analysis
Based on the sensitivity analysis, the main, pessimistic and realistic scenarios are formed. In this case, sales figures, exchange rates, probability data are taken into account: a sharp increase in the cost of attracting consumers, the share of non-payments due to deferments, violation of the deadlines for commissioning the facility, etc.
Using your financial model (free cash flow) and taking into account the liquidation or post-forecast value, you can calculate the IRR (internal rate of return - this is the "IRR" function in spreadsheets). It is also possible to determine the discount rate for the business, i.e. discounted cash flows and NPV (net present value). It is worth clarifying that in the income method of valuation, NPV is the value of the company.
All rows and columns are labeled - this will allow any user to quickly understand which indicators a particular block is dedicated to.
Get clients from the site every month
In a guaranteed volume
Read more
The calculation unit is designed . In philippine country code most cases, external users only need to familiarize themselves with the input and output blocks. However, when issuing loans, long-term financing, and in a number of other cases, they may need to clarify how the business was able to achieve the specified figures. Here, the calculation block will provide the largest amount of information. This means that all data must be signed in it.
All units of measurement are indicated - this should be done at least in cases where there is a possibility of doubt.
3-4 digit numbers are used . Anything else will be distracting. Format the cells - there is no point in changing the values manually or resorting to formulas.
Blocks are visually separated from each other by headers, important lines are highlighted in color. Table display styles will help to achieve the desired effect.
There is no maximum accuracy in calculating the indicators . The financial model does not aim to perfectly capture reality. If necessary, you can improve the accuracy of the calculations later.
Complex formulas are not used , because the simpler they are, the easier it is to read the tables and explain the values.
Download a useful document on the topic:
Checklist: How to Achieve Your Goals in Negotiations with Clients
Analysis of the resulting financial model
Once you have prepared your financial model, it is time to start using it. Choose different assumptions to identify risks and envisage several possible scenarios.
Most often, this tool is used for sensitivity analysis, in which each assumption is changed by 1 or 10%. This reveals the change in cash flow / IRR / NPV. The greater the change in the resulting indicator, the higher the sensitivity of the financial model to a specific factor.
Let's say that a 10% price increase resulted in a 20% increase in total cash flow, and a 10% decrease in variable costs resulted in a 5% increase. This means that the sensitivity of the model to price is 2, and for variable costs it is 0.5. Based on this, when preparing a business plan and running your business, you should pay as much attention as possible to the factors to which the model reacts most acutely.
Financial Model Analysis
Based on the sensitivity analysis, the main, pessimistic and realistic scenarios are formed. In this case, sales figures, exchange rates, probability data are taken into account: a sharp increase in the cost of attracting consumers, the share of non-payments due to deferments, violation of the deadlines for commissioning the facility, etc.
Using your financial model (free cash flow) and taking into account the liquidation or post-forecast value, you can calculate the IRR (internal rate of return - this is the "IRR" function in spreadsheets). It is also possible to determine the discount rate for the business, i.e. discounted cash flows and NPV (net present value). It is worth clarifying that in the income method of valuation, NPV is the value of the company.