Financial Modeling
Building a financial model for your business is crucial for accurate forecasting and informed decision making, therefore it requires a deep insight in accounting principles, financial statements, valuation methods, and Excel formulas, among many other things.
Financial Modeling is creating a numerical depiction of your company’s financial status for the purposes of forecasting, reporting, and decision making. When building a financial model for your business, it’s important to consider a model that maximizes accuracy, flexibility and is easy to understand.
There are miscalculations however, that happen when choosing the right financial model for your business and these include solely focusing on revenue, overestimating revenue, ignoring cash flow and failing to update the model as your business grows. These mistakes, among others, if not handled properly, can diminish the chances of growth for any business entity.
Let’s look at how we can understand the processes of building a financial model through the story of a new business owner named Sarah. We will explore the common mistakes that business owners face and how to arrive at the best solution for the business.
As a small business owner, Sarah had a great idea for a new product which she was excited to bring to the market. But before she could do that, she needed to create a financial model for her business.
Sarah knew that building a financial model was an important step in the process of starting a business. It would help her forecast revenue, expenses, and cash flow, giving her a better understanding of how much money she needed to raise to get her business off the ground. But, she was also aware that there were many mistakes that could be made when building a financial model, and she wanted to try her best to avoid them.
Mistake #1: Focusing on Revenue Only
Sarah wanted to avoid focusing solely on revenue. Even if she knew that revenue was important, it wasn’t the only factor that would impact her bottom line. To get the complete picture of her finances, there was also a need to consider expenses, such as the cost of goods sold, rent, and salaries. Therefore, she had to build and adopt a model that would put all factors into consideration, for a more accurate representation of the performance of her business.
Mistake #2: Overestimating Revenue
It is easy to overrate revenue, especially in the early stages of a business because of one being overly optimistic of the outcome. Sarah realized she needed to be realistic about her sales projections, taking into account factors like seasonality, competition, and market trends. In any case, overestimating revenue can cause an overvaluation of profit margins and hence misrepresent the actual performance of the business.
Mistake #3: Ignoring Cash Flow
Another mistake Sarah wanted to avoid was ignoring cash flow projections as a part of her financials. Even when revenue projections could be accurate, she could still run into trouble if she didn’t have enough cash on hand to cover her day to day expenses. She needed to include a cash flow forecast to ensure that she could easily meet her projected financial obligations.
Mistake #4: Failing to Update the Model
Additionally, building a financial model is not a one-time event, Sarah knew she needed to update her model regularly to reflect changes in her business, such as new product launches, changes in pricing, or unexpected expenses. Failure to constantly update her model could lead to inaccurate financial projections and poor decision-making.
Mistake #5 Lack of comprehensive skills in accounting, finance and business trends.
Now that Sarah had carefully analyzed some of the errors she needed to avoid, she also didn’t have the in-depth skill and understanding of accounting methods and principles. Sarah needed to hire someone with accounting expertise in valuation methods, Excel formulas and preparation of financial statements. This could be a very crucial piece of the puzzle, necessary to achieve accuracy for a true depiction of her financial standing.
Instead of hiring a full time accountant, Sarah sought help from a fractional accounting expert, with the knowledge and expertise in all accounting principles, as a way to avoid any mistakes.
She worked with the fractional accounting firm, who helped her ensure that her model was accurate and comprehensive, owing to their expertise in various financial tasks, across multiple industries. With the help of these experts she could also update her model regularly to reflect any changes in her business.
As a result, Sarah’s business was successful, and she was able to achieve her financial goals. She learned that building a financial model was not just a box to check off on her to-do list, but a valuable tool that could help her navigate the ups and downs of entrepreneurship.
With the Fractional Accounting model, Sarah was able to avoid these common mistakes while creating a financial model that was both reliable and actionable, hence using it to make smart decisions for her business.
The Bright Balance Accounting,
Financial model.
Fractional Accounting is a simple financial model offered by Bright Balance Accounting for companies of all sizes, in various industries. By going fractional, you’re able to flex your accounting needs up and down periodically, depending on the demand in your finance department at any time without having to lay off or train new employees.
Bright Balance Accounting provides comprehensive accounting services tailored to meet the needs of a wide range of businesses, from start-ups to large transaction-intensive enterprises. By adopting fractional accounting, companies can optimize their financial resources by paying exclusively for the tasks necessary at any given time, eliminating the burden of fixed costs associated with employing full-time W-2 employees. Whether you are embarking on a new entrepreneurial journey or experiencing rapid expansion and triumph, Bright Balance Accounting is equipped to support you throughout every stage of your business, ensuring efficient and effective accounting practices from inception to achievement.
Get in touch with us today and let us discuss how we can help you choose the right methods and systems for your business, to achieve unimaginable success. www.brightbal.com/contact
