The Basics of Financial Modeling and Financial Projections in the Business Plan

 

It is well known that financials are one of the most important aspects of the Business Plan. If you don’t have a background in finance or experience creating or reviewing financials or writing business plans, you may have wondered how the financial projections in the business plan get created. The answer: Financial Modeling.

There is a Big Difference Between Financial Modeling and Financial Projections

What often makes financial modeling and financial projections in the business plan tricky to understand is that people often confuse the two. They are intimately connected but, also quite distinct. Understanding the basics begins with defining these two concepts.

Financial Projections – These are static and once set do not change. They are the combined representation of how you expect the finances to change in both the short and long term. Financial Projections in the business plan typically take the shape of the standard financial statements.

Financial Modeling – The projections are the set numbers but, the way at which you arrive at those numbers is financial modeling. Financial modeling is the process of creating a financial model that will allow you to input numbers to see their output. These are typically produced in a spreadsheet format – such as Excel or Google Docs – or special software.

How Financial Modeling Becomes the Financial Projections in the Business Plan

In the sense of the financial projections in the Business Plan Writer, financial modeling is the process of creating them.

There is more than one way to approach a financial model and we’ll give you one example. You will setup a spreadsheet to look the way you want your end report to look. You will then begin setting up formulas to add, subtract, and otherwise calculate the way they need to. Where and how you setup these formulas and structure will depend on the information you’re going to work with and, to some degree, personal preference.

You may setup underlying information in other sheets, or even other workbooks, and have the results link/pull from those sheets. You may use the grouping function to setup all your input areas on the same page as the outputs and then easily hide them.

Regardless how you set it up, this model is what will create the final financial projections for the business plan. The mechanism, the tool by which you setup your formulas and input your assumptions is financial modeling. The end result is the projections.

Creating Either One Will Require Some Expertise

Financial modeling requires at least basic spreadsheet skills. Financial modeling requires good math ability to know how to setup your formulas required. You will also need to have solid assumptions. The assumptions are what allow you to predict what will happen in the future. Those predictions will come from solid market research and industry knowledge.

It’s clear to see that there are a lot of skills which are needed to do financial modeling well. That is why many people choose to hire advisors to help them with financial modeling or Professional Business Plan Writers who will also tackle the financial projections in the business plan. The financials are really important so, whether an its advisor or writer, make sure someone helps to construct them in a purposeful and meaningful way.