As a business owner, when talking about models, you are talking about financial models. The type of model that shows you where your business is going to be in five years time. The type of model that helps you raise capital (also read, Funding Your Dreams), understand working capita requirements and when you will need funding to grow your business. A financial model is an illustration of your vision for your business – and a working tool that continually needs to be updated. Whether you want to minimise your expenses, understand how or even where your business needs to grow or simply report on financials, an operational financial model is a key to unlocking business value.
A Financial Model isn’t static either. It changes with the business, with moving markets and with new products and customers. It should be continuously updated. This also helps the entrepreneur to assess whether their forecast became reality and if it was vastly different, to understand where the error in the modelling process is. All of this aids business understanding – a model is both a vision for a business and also a reflection of its current reality.
Most importantly for an entrepreneur, a Financial Model shows actual CASH FLOW. Cash is King, and a business can only survive on actual cash flow (not cash which may or may not materialize in a few months time). An entrepreneur needs to ensure that their cash is always sufficient to pay suppliers, staff and their expenses (plus a salary), and of course any debt. Many a business has failed by not ensuring there is sufficient cash in the business. Don’t fall into this trap and ensure your model is cash flow focused and not just built for accounting!
Good luck and happy financial modelling!
Now read all about forecasting in models.