Financial modeling is a tool which will help a business owner become more aware of the costs and profits that result from management decisions. For instance, when you open up a new location or hire a new employee, those are events which will have an impact on your company’s bottom line.
By using financial modeling, you’ll have a much better understanding of the effect that such moves can have on your business, which will prepare you to make better decisions in the future.
Techniques for financial modeling
Using your financial statements and coupling them with market research will generally give you the most accurate results during financial modeling, and a good starting point is to establish the most extreme possible outcomes. By modeling the worst-case scenario and the best case scenario, you’ll instantly have a good idea of the possibilities, and you’ll quickly see what all the other possibilities are in between those extremes. During the modeling process, you can substitute variables such as market size, price per unit, and estimated profit, in order to observe the impact they have on your business.
Benefits of financial modeling
One of the biggest benefits of financial modeling is that it adapts very easily to changes in your small business. You always have the capability of swapping out different numbers to see how that changes your bottom line. The three most popular standard models for financial modeling are the three statement model, the discounted cash flow model, and the budget model. The three statement model uses income statements, balance sheets, and cash flow to generate cost and profit information. The discounted cash flow model builds on the three statement model in order to value a company. Finally, the budget model is one which is generally used to establish a company’s budget and to have a good understanding of profit and costs.
Financing through Value Capital Funding
Virtually all businesses require capital funding at various points in their life cycles. When your business is in need of funding, contact us at Value Capital Funding, so we can explore some options which may benefit your company.