Answering the Question: How Important is Financial Modeling in Creating Financial Projections of a Business Plan?

 

People who are unfamiliar with Financial Modeling often consider it as something scary and overwhelming. It seems like a tall task outside of creating the financial projections for the business plan. However, this is not the case. Before we go too far, let’s answer the question above.

So, how important is financial modeling in creating the Financial Projections Business Plan?

The short answer: imperative.

You Can’t Have Financial Projections in a Business Plan Without Financial Modeling

Why is it so imperative? The biggest reason and explanation for this is because you literally cannot have the projections without the modeling. That’s just not how it works.

Think about it, when you sit down to determine the Financial Projections for your business plan, you will usually start by putting down your current financials. Then, you layer on top of that the assumptions about what your business will do in the future. This use of math to arrive at the new number is financial modeling.

Usually, financial modeling is done in a spreadsheet like Microsoft Excel or Google Sheets. But, even if what is discussed above is done on a cocktail napkin, it’s still a form of modeling.

Financial Modeling Isn’t as Scary as People May Think

The example given above is a very simple, basic example of financial modeling but, it’s nonetheless relevant. When people think about it in terms of these complicated equations and big spreadsheets it may seem overwhelming. But, it doesn’t have to be and it is rarely the case.

If you are an entrepreneur and you’ve been running or planning a business, you will already have the key ingredients that should go into your model. You have an idea – more officially called an assumption in modeling – of what your business will do based on various factors.

These factors will typically include things like market research, customer feedback, level of competition and other things that you are probably already thinking about. All Financial Modeling prompts you to do is quantify this knowledge and apply it in a numerical equation to arrive at a certain number.

If You’re Still Unsure or You Really Do Need a Complex Model, Hire a Professional

The part some people struggle with the most isn’t the knowledge about what direction the business will go in but, how to use Excel, other spreadsheet, or modeling software. As a busy entrepreneur if this is not already in your skillset it can be daunting to learn.

In this case, it may be most practical to bring in an advisory professional who can help! You may be able to find people that list themselves as financial modelers but, a better option may be a business plan writer with advisory experience.

Why is this? Because unlike Excel savants, business professionals understand the numbers in context. They will be able to ask the right questions to create the right model. They don’t simply put in the numbers and assumptions you may provide them but, they will also validate and question them as you go.

This process is usually highly beneficial because if you are creating Financial Projections Business Plan it is most likely for an external audience like a bank loan officer or an investor. They will scrutinize your numbers closely so, having the backup of well thought through and supported financial modeling will go a long way.