Financial Modeling vs. Financial Projections in the Business Plan – Which is More Important?

 

When it comes to planning a business, the financial projections in the business plan are arguably one of the most important parts.  You may or may not be aware that financial modeling is involved too.  These two aspects of the business plan – Financial Modeling and financial projections – are clearly important but, is one more important than the other?

Defining Financial Models & Financial Projections

Before we get too far ahead of ourselves, make sure you fully understand what these two terms are and how they are different.

·         Financial Modeling – Think of financial modeling as a verb.  It is the action required to model out nearly any financial scenario you’d want to understand.  A financial model is a dynamic document, typically created in a spreadsheet format, that allows you to put in various inputs to see how they will impact potential outputs. 

·         Financial Projections – Think of financial projections as a noun.  Once set, projections do not change.  They are one of the possible end outputs of financial modeling.  They are meant to demonstrate your expectations for where a company will end up given reasonable assumptions.

Financial Modeling Feeds Financial Projections in the Business Plan

Now that the distinction between the two is clear, we can move on to how they relate.

When creating Financial Projections Business Plan, most people’s first step will be to sit down and plan out their financial modeling.  As already mentioned, this will usually be done in spreadsheet software.  The model, where you will put in assumptions and the numerical representation of your plan, is the vehicle that allows you to arrive at your financial projections.

Can Financial Projections Exist on Their Own?

While financial modeling and financial projections are different, they are ultimately two sides of the same coin.

It’s conceivable that you could pull random numbers together to create financial projections but, that wouldn’t make much sense.  Answering the title question, “which is more important?” when it comes to financial models vs. financial projections in the business plan, the answer is a resounding BOTH.

Financial modeling serves no purpose without an output to work towards, in this case the financial projections.  In terms of Financial Projections, the only way you can apply all of the assumptions in a coherent way is through financial modeling.

Do You Need to Be a Financial Expert?

Financial modeling doesn’t require you to be a finance guru.  In terms of using them to create financial projections for the business plan, all you really need to understanding is two things:

1.       Basic Financial Projections – The biggest challenge in creating financial models is understanding the end output you are planning to produce.  Everything basically works backwards from there.  So, be clear on what the core financial reporting documents are that are to be projected.

2.       Using Spreadsheet Software – Beyond understanding the projections that you are trying to produce, the only other thing you to have for financial modeling is intermediate spreadsheet skills.

If you have these two main skills, you are well on your way to creating excellent financial projections for the business plan.  But, what do you do if this doesn’t apply to you?  The good news is you can get someone else to do them for you!

Professional business plan writers often have someone on their team who can tackle the financial sections.  Searching solely for a financial modeling expert can be far more difficult than going directly to someone who deals with business plans. 

If you are planning on hiring someone to do the overall writing, you may want to check with them if the financials projections for the business plan are also something they can do.  Having their own team do it will help ensure a seamless business plan.

Looking for a company that can write your business plan and do all the Financial Modeling to arrive at your projections?  Check out Joorney Business Plans!