No, I’m not talking about the 7Ps of marketing-fame, but the 7P approach from the British Army adage: Proper Planning and Preparation Prevents Piss Poor Performance (excuse my language!) So now you’re thinking, “Well, that’s all very well, but what does that have to do with financial modelling?” Well, it has EVERYTHING to do with financial modelling.
Imagine being invited to a party and then walking into an empty room. No decorations, no music, no cake! It certainly wouldn’t feel like it was going to be fun, or that someone even cared enough to get things ready. Now think of the 7Ps…and you get my drift. Its exactly the same when it comes to financial modelling.
Why build a financial model?
But what is financial modelling? Wikipedia defines it as “the task of building an abstract representation (the model) of a real world financial situation.” Put simply, it’s the process by which a company can imagine different scenarios for their business and work out their financial impact. For example, when you are thinking about what price to charge your customers for a particular product or service, you can model different types of goods/services at different price points. A financial model will show the impact of your pricing at different cost bases on your break-even numbers. Using the model, you will be able to flex your numbers to show what you need to sell, at what price and cost base, to make X% profit. Financial models can be scoped on different parameters depending on each individual business’s requirements. So you see, when thinking about financial modelling in a very practical sense, it’s an incredibly powerful tool that helps companies make decisions.
Planning and preparation for your financial model
With the 7Ps in mind, here’s what you’ll need to think about to build your financial model:
- Clearly articulate your financial goals
- Identify what you will need to understand to reach these goals
- Ensure you have your most recent numbers to hand
- Think about which parts of your operation have the greatest impact on your costs and profitability
- Identify the different scenarios that you want to plan for
- What time-frame will your model have?
- What level of detail do you want to go in to?
- Write down a list of assumptions – you can’t know everything!
How can Business Clan help?
If the thought of building your own financial model feels overwhelming, we are here to help you. We build an easy-to use, clear financial business model, taking a top-down and/or bottom-up approach. Don’t worry if you feel that you don’t have a handle on the numbers – that’s our job! We establish a thorough understanding of your business right from the outset and will flow this knowledge through into your model.
When we build your model, we consider all the relevant components, such as sources of turnover, fixed and variable costs, and we create it so that key numbers, such as number of products/services by type per month, can be easily changed. Each financial model is tailored to the goals of each individual business.
Your financial model can be adapted as your business grows, to cater for different scenarios such as acquiring premises or planning for capital investments. We work with you so that you gain a clear and thorough understanding of your model and you are able to use it independently. However, we can also “hold the reins” should you prefer, and review it with you on a regular basis. What level of regularity you require is something you can decide. We know that all of our clients are different, and work with each to find their best outcomes.
If you would like help to build a bespoke financial model for your business then do contact us.
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