A financial model is basically a decision-making tool that helps in taking and making all and any type of decision. It might help a company in decisions regarding starting a new venture, a new project entry, investments in some big companies or even merger and acquisitions.
For any company to have a clear idea or overview about any of the above, it is important that they get a clear view about how the finances would be and how would they be able to manage their existing funds into both investments and their routine running of the company.
What would a financial model do?
Now that we know the reason behind why people or business insist on having a financial model, it is now important and essential to know what would this financial model do when it is implemented.
Yes, this helps a company in creating a mock scenario of an investment, the impacts and effects it has on its customers, the outcomes from its implementation and the success ratio it would have when implemented in real. Now this gives a complete understanding and overview of how it would be to have it in the market real-time.
Technology plays a very important and essential role here wherein companies use many different software and applications in creating and designing these models. But predominantly it is the simplistic excel sheets that help us come up with one of this kind.
A proper financial model recipe
A well built and a properly planned financial model would be like this consisting of all the essential details in detail.
- A properly assumed model with the essential and realistic assumptions.
- A proper flowing model with no mismatching steps or confusing assumptions.
- No huge numbers. This would make the assumptions too unrealistic and something that might not be related to or applied in a real-life situation.
- It should be clearly designed in a way understandable and agreeable to all those this is presented with so that the model is assumed complete because when this reaches the end-customer, who is the target ultimately, it needs to be transparent.
- There should be clear instructions so that in case of any confusions, people are able to follow them without any assistance.
- Everything should be in a printable format.
- All the information, assumptions and facts should mandatorily come with a back up so that they are brushed back for any clarifications.