Financial Models are integral components of Business Plans, a Private Placement Memorandum, an Independent Valuation Analysis, and for Strategic Planning.

 

Problem

Creating financial models that are both comprehensive and easily modified is time consuming and detracts from a CEO’s focus on running the business. How does one incorporate new market information, a new product, or a new market channel into an existing model? What is the impact of outsourcing or in-sourcing certain functions? How much can the major functions be tweaked? Which market channels offer the low-hanging fruit and how might this impact future profitability? Which of several product/service scenarios is optimal in the short-term vs. the long-term?

Solution

Financial modelling is both an art and a science. Each primary document used by the company needs to have a financial model behind it. The Business Plan and PPM need to be aligned with  the same modeling. The forecasts lead corporate management to know how much funding is required at different time periods. Financial models can be used to thoroughly understand the impact of critical inputs to the business such as supply chain, salaries, personnel, pricing, benefits, new markets, new product expansion, outsourcing, different funding options, and capital needs. When done properly, the financial modelling process can help direct the firms focus, adjust for changing strategies, and assist in establishing important performance or benchmark metrics. Flexibility and thoroughness is critical to provide support for future growth.

Scenario Analysis can take many forms – what is important is the ease with which to make input changes and to compare outputs of various scenarios. Does the business benefit by utilizing different revenue channels? What is the impact of pushing one channel over another? In a product/service development scenario analysis – how fast should new product(s)/service(s) come online? Can you easily perceive the differences for capital requirements, marketing expense and profitability in comparing scenarios? Do you understand the sensitivity to critical components of each scenario?

The Independent Valuation Analysis is a completely separate and unique financial model to support its conclusions. Extensive valuation analysis including comparable fundamental data for an appropriate benchmark group, comparable valuation data, current valuation analysis, future valuation at different time periods based on forecasts. Different valuation methodologies may be appropriate at different timeframes for the new venture.

Its important to create a variety of charts and tables to incorporate into the Business Plan, PPM, Executive Summaries, and the Independent Valuation Analysis. The model supporting the BP and PPM has greater detail on the organization expenses, while the model supporting the IVA has far more valuation analyses materials.

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