Financial Modeling: An Important Key to Business Plan Success

1. Financial Modeling: An Important Key to Business Plan Success A strong argument could be made that the financials are the most important part of a Business Plan. The only way to develop these financials in a sound fashion is through the process of financial modeling. Financial Modeling is one of the most important tools you have in creating a successful business plan. How Financial Modeling Works Financial modeling is a way of creating an “abstract representation of real-world financial situations”, particularly as they apply to business. They are working representations, usually created in a program like Excel, that allow you to input various scenarios to see their potential financial outcomes. This representation helps guide businesses to making informed, well-considered decisions even in complex situations. Financial Modeling in the Business Plan’s Financial Projections Financial modeling is used in a business plan to create Financial Projections. Unlike financial

2. modeling, which is meant to be a “living” document that will have multiple outputs based on different variables, financial projections are static figures that do not change. These financial projections are in essence the goals of the business. Existing, future projections may be overwritten by new projections later but, the original projections themselves will not change, rather will be replaced by more recent, and often more informed, projections. Break-Even Analysis: Financial Modeling Example When it comes to creating your business plan, financial modeling will play a role in all of your financial projections in one way or another. Let’s take the break-even analysis as an example. A break-even analysis shows when a business will become profitable. It is based on how much you will charge for your products or services, your sales volumes, and the expenses you expect to incur. You may have an idea of your sales volumes and revenue or the expenses you will incur, but it’s only when you begin to put it on paper, via financial modeling, that you can start making real decisions about your business. It will help you decide what expenses to take on and where you may need to cut. It will also help you set your sales goals. Financial Modeling allows you to start putting in your planned expenses as you do research. It lets you adjust all the numbers as you go, do research, and make decisions. As an example, after research and listing your expenses, your total expenses for three years come to $100,000. However, your sales expectations are only $80,000, which would lead to a $20,000 deficit. If you want to break even in the first three years, you have a couple options for the business plan at this point: · Reasonably increase sales expectations, either in volume or revenue

3. · Find ways to decrease some of the expenses · Completely cut some of the expenses Financial modeling in the business plan financials allow you to see an issue in abstract, on paper, well before it occurs. It allows you to better plan and support your financials to get a clear picture. Your financial projections will rarely fall together without research and evaluating various scenarios. It will almost always require financial modeling to make important decisions about the business to set realistic, reasonable financial projections from the beginning, so you have the most sound, stable, and realistic Business Plan possible.