Financial modeling is one of the best ways to determine which steps to take next and grow your business. Companies of all sizes can benefit from this finance technique, and you do not need much more than a spreadsheet program and the correct numbers.

What It Is

Financial modeling is putting various scenarios and numbers into a formula and evaluating the results. This formula can be on a spreadsheet or other software as long as you can find a visualization that works for you. For instance, you can generate a spreadsheet for your company’s costs and profits to show how each one is affected by buying new equipment, paying down debt or hiring additional employees.

There are two main models used in this process, the three statement model and the budget model. When using the three statement model, you will be using numbers from your balance sheets, income statements and cash flow. The budget model is frequently used to create a budget and can be helpful in a business plan. Other financial models will build from those two, such as a forecasting model.

What the Benefits Are

Modeling your company’s finances can help you determine the best and worst-case scenarios for decisions you are currently trying to make. This method can also show you what steps to take and when to reach your growth goals for the quarter. It can be an excellent idea to include financial models in your business plans, especially when applying for financing. These models can show underwriters that you have thoroughly researched your budget for the funding and help predict your ability to repay a loan.

How To Use It

It is crucial to use real-world numbers and data for modeling your company’s finances. For instance, if you are trying to model what will happen if you can double your output by opening another factory line, you will want to use numbers reflecting product demand, overhead costs, and the equipment’s price. This data will usually come from your financial statements and market research.

One of the best business tools and techniques you can use for your company is financial modeling. You can create an economic model for your company and goals using a basic spreadsheet and real numbers you take from your financial statements and market research. You can use different types of models to forecast sales, create a budget, or break a growth goal into manageable steps.