Making action-oriented financial models

What is your perception of a financial model (FM)?


Here are some of the common myths about FM, see if yours is one of them:


1. I need it when I am raising capital.

It is not just an activity to be performed while raising investments.


2. It is for valuation right. I don't know if I need one at the moment.

That is just one use of the use cases.


3. The right FM will make me come across as successful.

You can be as successful as you want on a spreadsheet but why do companies fail?


4. If my product is right, I do not need one.

Cash flow is the #2 biggest reason for start-up failure.


5. My business is too small for it.

That's more reason why you need to invest in it at this stage.


Sorry to burst your bubble -

Financial modelling is a management tool!


Here's what you can do:


+ Help simulate different scenarios

A financial model should allow you to stress test various alternatives for business growth and it's implications on the cash flow.


+ It should become your central decision making backbone

It should allow you to understand the dynamics of your business and make actionable decisions to make it more efficient.


+ It should create your review mechanisms

You should be able to monitor plan vs actual performance of the company and make necessary tweaks.


IMHO, financial modeling is not just projecting and arriving at a price tag for your business, it is about how an entrepreneur can use it effectively in decision making.


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