Understanding How Financial Modeling Leads to Financial Projections in Your Business Plan

 

One of the most mysterious parts of a business plan to those that are unfamiliar with business is often the financials. Despite appearances, the financial projections in a business plan are not a work of magic. Rather, they are a work of art and logic derived from other information that will go into the business plan combined with Financial Modeling.

Financial Models & Financial Projections Defined

The first part in understanding how financial modeling leads to financial projections in a business plan is to understand the difference between the two. Financial projections are static, unchanging goals or targets. Once set, new financial projections, forecasts, or budgets may override them but, they themselves do not change. In essence, they are locked in time.

Financial modeling on the other hand is intended as a tool to review various scenarios and help in making decisions. It is a template, customizable tool, that will change with various inputs. It is meant to review possibilities of a financial scenario or multiple scenarios. When it comes to a business plan, financial models are used to help create the Financial Projections. They are also used in everyday business for a plethora of reasons and to consider multiple circumstances and understand how they will financially impact the business.

Financial Modeling in Financial Projections

Market Research will play a very large role in the financial projections in the business plan. The market research process will hardly answer all questions about whether or not a business can be financially successful. However, it does give a strong indication of the potential open market for a business and will help a company pinpoint a reasonable range for what they may expect in revenue.

Expenses typically seem more concrete than revenue but, they too will vary within a reasonable range. It is through the process of financial modeling that you will run various financial scenarios to determine where your comfort level is for your business. This process of financial modeling does establish the financial projections in the Business Plan but, it is doing something even more important. It is setting the sales goals and expense budgets as well.

In terms of the financial projections for the business plan, financial modeling will allow you to settle on numbers that can be supported and are realistic but, will also paint a positive picture of the business. After all, you wouldn’t be trying to start or grow a business if you don’t believe it is going to work out. Your projections are just as useful to setting goals for you as they are presenting your business to a potential lender or investor. One important thing to remember is regardless the various models or projections you have come up with, the core numbers of your business plan should not change regardless who they are being presented to.

Financial modeling and Financial Projections Business Plan will both be used to guide your business. You will likely use financial modeling daily or weekly to help guide business decisions. The projections, though static, will set goal posts for the business, especially in the early stages and for the short term. Both are important to running a successful business.