Friday, April 17, 2020

Why are Business Financial Models Important for Small Business Owners

Why Are Business Financial Models Important?

Significant Pain Points of Not Having and Comprehending the Business Financial Model
  • Lack of Direction
  • Sales and Marketing Efforts are Not Fully Maximized
  • Business Owners / Principals Have No Focus on Building or Extracting Wealth for Retirement or Family Estate

Benefits of Having A Business Financial Model
  • Yields a Logical Thought Process for the Business
  • Provides a Comprehensive Model for Planning and Executing the Operational and Financial Components of the Business
  • Gives Investors and Bankers a Way to Quickly Evaluate and Assess the Value of the Business

What is A Business Model? Laying the Ground Work...

Business Model Definition - "A business model (also called a business design) is the instrument by which a business intends to generate revenue and profits. It is a summary of how a company means to serve it employees and customers, and involves both strategy (what a business intends to do) as well as implementation (how the business will carry out its plans)" Source: Wikipedia

Business Financial Model Definition - "Financial models are not about absolute values; they are about relationships. A good financial model demonstrates the relationships and the business tradeoffs that compose the profitability potential of the business idea. If you understand the relationships, the drivers of revenue, drivers of cost, and the critical success factors, you understand the core of the business." Source: Pro Excel Financial Modeling by Tom Y. Sawyer

Major Components of a Business Financial Model
  • The Staffing Model
  • Sales and Revenue Model
  • Cost of Goods Sold and Inventory Model
  • Cost of Sales and Marketing Model
  • Operating and Capital Expenditures Model
  • Statements of Profit and Loss and Cash Flow

Who Needs A Business Financial Model? 

Start up and early stage entrepreneurs and business owners (1 to 5 years of operations) use Business Financial Models as a tool to create a dynamic business; it is a building block that leads him or her to a strong, profitable business.