The Necessity and Benefits of Financial Modeling in a Business Plan

 

A business plan is an extremely useful document that can serve a few purposes: as a detailed step-by-step road map to follow, a document to make business decisions and track progress, and a tool for gaining investments and loans. But no matter its intent, its components are universal, one of them being your business’s finances. And what better way to present your business’s finances than through Financial Modeling, a process in which all of a business's earnings and expenses are put through a mathematical equation, designed to test multiple different scenarios and predict future financial outcomes?

There are a few reasons why financial models are a necessity for any business plan.

Making financial projections

Financial models are used to cast predictions on a business’s future performance, in other words making Financial Projections. Making models is a long number crunching process but to put it simply, models are made by making various assumptions, based on which numerous scenarios can be made to calculate multiple possible outcomes.

Having several scenarios (or financial projections) for your business is very beneficial, as it will show you the full spectrum of possibilities for your business. Making the most realistic, the best and the worst scenarios will show you what to expect, what you can aim for, but also what to be on the lookout for. Seeing exactly where your business might be headed can help you make decisions early on, that can prevent disasters, or at the very least, help you make a plan b.

Gaining funds for your business

Furthermore, financial projections are one of the most important aspects of your business plan, since many investors or lenders will be interested to see if your business will be able to make a profit in the future. Investors are looking for an ROI, and lenders will want to make sure you can repay your debt. So if your goal is to get investments or lonas, doing financial modeling for your Business Plan, you will greatly increase your chances for success.

Making decisions

One of the biggest benefits of financial modeling is just how great of a decision making tool it is:

• It is a great way for planning projects and deciding on their budgets. For a successful project, good planning is needed from the start. Financial modeling can provide a perfect overview of the funds needed for the project and whether they can fit in your budget. But, it can also predict the losses in the event that the project fails. Having all of the possibilities displayed can help you make the best possible decision.

• Models can show whether there is excessive spending in certain areas of the company or if others are lacking resources, showing ideal opportunities for better allocation of funds, and making your business operate more smoothly and efficiently.

To make a long story short, Financial Modeling is necessary for any decision making process in a business, but also for gaining funds and investments. It is not only necessary for making the most optimal business plan, but it is of great benefit when aiming for success.