Financial Modelling – Tips To Getting It Right

A sound financial model and projection is one of the core ingredients of a business plan.

Here are some thoughts on how to do it right.

1. Keep it real. Don’t overstate sales projections. It is a common enough mistake to make because human nature says we want to put the best case forward. The solution is to have various scenarios, assign some probabilities, and tell an investor honestly what needs to happen to reach these targets.

2. State assumptions clearly in the projection, so the investor knows what it is based on (fact, opinion or fiction).

3. Make it easy to adjust and show the consequences – what if sales are lower, what if churn is higher, what if our costs decrease, what if our main customer leaves? Investors are a (justifiably) cynical bunch, so you need to be able to lay out a best case and a worst case scenario.

4. Show the impact of growth on cash flow. As sales increase, what is the increased need for further capital. This will show an investor not only how much they’ll need to put in, but when.

5. Acknowledge knowledge gaps. If you don’t know something, that is OK. Explain the gap in the knowledge and either how you’ll get the knowledge, or its likely impact if you don’t. If you claim to know everything, it’ll be clear you are not being honest.

6. Focus on readability – it’s easy to get wrapped up in the complexity of your own spreadsheet and end up with a wall of numbers which is incomprehensible. KISS (Keep It Simple Stupid). Use clear labels, colour code, space, and remove less material variations (put them elsewhere). Separate inputs and variables from calculations – so the user can see what they can adjust.

7. Get in a pro. You may be surprised by what you can achieve in Excel. For a small investment (a few hundred to a few thousand dollars) you can may build something which becomes a key factor in winning over an investor. Remember the quality of the brief to the programmer may have a major impact to the success… don’t assume they know anything about your industry. Explain everything.

8. GIGO (Garbage In Garbage Out). Get good input figures.

Scotia Macleod provides financial modelling services as part of its corporate advisory role.