Top 5 Tips for Developing a Custom Financial Model For A Business

 “The best financial models are simple enough for anyone to understand, yet dynamic enough to handle complex situations.” – Tim Vipond.

Well, this quote completely goes with every business today. At some point or another, every business requires a financial model for its decision-making. But, it is not as simple as it may sound. It is vital to understand and to use the right tools to make an effective financial model. 

This write-up will give you some tips to make financial models, as there are many who find it hard to make an effective financial model due to its complexity. But before starting with a few tips, it is important to know some basics.

Financial Model 

A data representation that helps scrutinize and improve the dynamics of a business’s finances is known as a financial model. The major purpose of a financial model is to predict financial outcomes. Often, people hire so many different professionals to make this model and update them on regular basis.

Financial Model Types

The major types of financial models used by companies are: 

• Consolidation model
• Budget model
• Three-Statement model
• A discounted cash flow model
• Merger model
• Forecasting model
• Option Pricing model

But when it happens to choosing the right custom financial model Vancouver, one must consider the corporate finance interpretation and needs of the business. It’s because the major goal of a financial model is to analyze the business finance properly.

5 Special tips to make your financial model stand out from others –

1.    Make use of color coding: Using color coding is one of the best ways to distinguish all the constants from formulas. But whenever deciding on the font and fills colors, remember there are 8% of men who are known to be colorblind and maximum numbers of effective spreadsheets are printed in black and white format. 

2.     Make a separate area for main drivers and assumptions: This is something that one should do in the starting and must be placed at the left or top of the financial model. Doing so can help a likely investor understand better what the business owner thinks are the essential drivers. In addition, it also works great in facilitating both tweaking and auditing of forecasts.

3.     Use some excel tips and tricks: Well, excel is the main tool used to do financial modeling in different corporations, banks, and institutions. The reason behind its extensive usage is one – its phenomenal versatility. To make the most out of it, here are some of the top tips for you –

Ø  Try making the use of as many shortcuts as you could

Ø  Make use of grouping function

Ø  Try keeping all the formulas and calculations simple

Ø  Make use of trace precedents to do auditing

Ø  Make use of some date functions and add IF statements to make it more dynamic

4.    Organize all the tabs: Whenever different worksheets are used, each of them must have a meaningful name and be placed in a logical manner (i.e., left to right). However, one of the amateur moves would be to use a default setup.

5.   Cash is the major deciding factor and works as king: A financial model that clearly shows aspects like a beginning case, revenue, expenses, and ending cash works great in telling the whole story. This is known to be one of the traits of a great model. Therefore, make all the cash collection related things added to your business financial model.

If you have the right set of skills, expertise, and follow-up with these tips, then one can easily develop a great financial business model. Just make sure to follow it rightly, or if needed, avail professional assistance to help you with custom financial model Toronto.

Making a custom financial model

According to industry experts, it is better to make a financial model in excel sheet rather than some other software. It’s not that hard to make it, but yes, it takes years of practice to make effective ones. There are many courses that are provided online to help people learn about making them. However, if you wish not to make this financial model all on your own, you can consider getting some outside help and work together on developing the custom financial model for your business.

Why developing a financial model is important in business?

These models are important because they work as the key to success in different areas, such as financial planning, investment planning, and corporate development. So many businesses today rely on these financial models for their expansion and growth. There are so many important decisions, such as whether to invest in a specific project or not, acquisitions of different assets, and a lot more that depend on these financial models.

When making these models, going merely with your instincts and personal choices can be the wrong choice to proceed with. The best thing here would be to deal with all such situations effectively, interpret all the likely outcomes, and then making the right choices after adequate consideration. Giving proper time and efforts to financial planning should be one of your topmost priorities to make something good out of it.