Now more than ever, it’s vitally important to understand your financial condition and how future decisions will affect growth, profitability and—most importantly—cash flow. As you contemplate the impact of negotiating key supplier relationships, re-evaluate workforce, and make decisions on capital expenditures, you need to understand the impact each has on cash flow. It's also important to analyze your financial metrics in contrast to industry peers utilizing real-time data from private and publicly held companies.
Financial modeling is a key way to understand the current state of your business and where it is headed, even during times of uncertainty.
It’s never been more important to consider how your business will continue.
What Is Financial Modeling?
Financial modeling is building a proforma financial that can be manipulated to make business decisions. Financial modeling allows you to perform what if or sensitivity analysis, which can help you understand short-term and long-term impacts of potential scenarios.
What Items Should I Consider in Terms of Financial Modeling?
Generally speaking, increasing cash flow involves either increasing revenue, decreasing expense, or improving asset management.
Increasing revenue may be a real challenge right now. Companies may shift from growth mode to contraction and expense reduction. Many may analyze the income statement expense accounts line by line and focus on variable expenses, including:
If your industry or business changes significantly, fixed costs will also need to be analyzed.
Don’t forget the impact that asset management has on cash flows. Think about improving the cash cycle from when money goes out of the business to when it comes back in.
How to Begin Financial Modeling
You first need good historical financial information. From there, you can build out a spreadsheet that assess various components you’re hoping to track, like historical margins, growth rates and so. These scenarios will allow you to make assumptions and forecast future financial results.
It is important to build a model that allows you to make changes easily and track what results you get from these changes. A good financial model should be simple and easy to use. By using a well-structured layout, it will help you make more sense of the data you’re looking at.
While you can do financial modeling yourself, it also an option to have a trusted business advisor do it for you. They will have much of your historical financial information already and can further help you understand the various impacts of scenarios on your business.
Specifically, they can:
The Importance of Financial Modeling
In the wake of uncertainty with COVID-19, it’s important to know where your business is at and what impacts various factors may have in the long-run. This information will help you understand how future decisions will affect cash flow. Identifying areas of improvement and modeling “what-if” scenarios can help you make strategic, proactive decisions for your organization.
Unsure how to get started on financial modeling for your organization?