Financial modelling is essential in running a business because through it, you will have a good insight into the value of your business in comparison with your competitors. It is also valuable in evaluating various kinds of business scenarios such as in calculating the costs of new projects or deciding on the budget of your company. In making a financial model for your business, below are some of the most common mistakes that you should avoid.
Too Simple or Complex
One of the primary mistakes that you need to avoid when it comes to generating a financial model is coming up with one that is either too simple or too complex. If it is too simple, there may be instances wherein the numbers no longer trace back to the original drivers. On the other hand, if the model is far too complex, it may be too difficult to understand and manage. This is where you can consider outsourcing financial modelling services. The experts in generating financial models will see to it that the model they come up with for your business is neither too simple nor too complex.
Lack of Flexibility
Another mistake that you should avoid when generating a financial model is the lack of flexibility in the output that you create. As much as possible, you should no longer have to make several manual adjustments to reflect the changes that you are trying to forecast using your model. Rather, you should be able to lay out the key drivers that will allow you to easily run sensitivity analysis on various types of scenarios. Thus, make sure to avoid any hard-coded numbers in your model as well.
Lack of Logical Structure
In creating a financial model, you should also consider a logical structure. While it is true that your model may be composed of several sheets, you should avoid creating sheets that are too long or arranged in a haphazard manner. Rather, order the sheets logically or in a chronological manner such that one sheet will seamlessly flow into the other through a hyperlink that you can easily navigate. It goes without saying that you should fully integrate the balance sheet and the cash flow for you to be able to forecast your cash position with confidence.
Lack of Executive Summary
Finally, every financial model should include an executive summary that will instantly give the reader an idea of what the model contains. The executive summary should also be readily printable, illustrating the revenue, costs, profit, and cash balances in a chart that can easily be understood at a glance.
When it comes to generating financial models, make sure that you avoid the mistakes listed above. Other than this, you should also ensure that there are no formula errors or hard-coded numbers in your financial model. In this case, make sure that you perform sanity checks or create a built-in automatic error check. All these are geared towards ensuring that you come up with a reliable financial model for your business.