Why Financial Modeling is Important for Businesses?

The word “Financial Modeling” mainly use when most of the companies think about a three to five years of financial analysis according to their business plan. Financial Modeling is an important element to start any business or for the existing business, those want to grow to the next level. This model is a tool that simply built in Excel to forecast a business’ financial performance into the future. 

This definition is accurate, financial modeling application is exorbitant and it needs to provide vision to nurture the early stage of the investors and to provide valuable information to the stakeholders. 

Why we need a Financial Model?

The main point is why a business should consider these financial modeling applications? The answer may be varying and it mainly depends upon the needs of the organization but it consists of :

1. Handle cash flows

2.  Recognize financial risk and strategy

3.  Examine your quality earning

4. Analyze EBITDA

Like most of the companies, human capital is stretched. So it does not matter whether it is CEO, sales, marketing or purchasing executive, financial modeling is a focal point to take various decisions.

Moreover, external stakeholders such as investors, venture, bankers, private firms and vendors demand financials as evidence to properly fund an organization’s growth.

Some of the Major Benefits of Financial modeling :

1. Help in Deep Analysis

To develop a financial model, it needs to have good knowledge of the business. This process forces the business to jolt down the list of impacts on the business. It also forces us to think about the changes that may occur in the business internally and externally. It is one of the best ways for a better understanding of the business. Therefore, the creation of financial models has a deep impact on the business for a better understanding of the business. Zero accountant is beneficial if your are new startups in the industry.

Financial Modelling

2.  Funding Strategy lies on it

Understanding the business process is compulsory for any company that is working to create financial models. The cash flow of the company may suffer from the borrow ability and the amount of the interest to be paid. All these factors help to make a better fund strategy. For example, start-up business has uncertain revenue. Hence, their expenses are not constant. 

The financial model help them to decide where to spend the money and where not. To start companies are able to ascertain the amount of equity stake they should sell so as to reach the next milestone.

3.  Help in Correct Valuation

No doubt, financial modeling helps the companies to know about the true values of any business.  Any company is judged on the basis of discounted cash flow without modeling. People think that revenue and expenses are directly proportional to each other but this not true in every case.  

Financial modeling help to calculate the exact amount of the cash flow. This helps businesses to know their exact worth when they are selling out their stakes to third party investors such as investment bankers and private equity funds.