WHY DO YOU NEED A FINANCIAL MODEL?

If you are starting a business you must have heard about financial modeling. Let me tell you what exactly financial model is and why you need it.

Financial model is a mathematical model which is designed to represent the performance of a financial asset or a portfolio of a business, project or any financial investment.

Firstly let’s know which group of people needs a financial model

There are following groups of users who need a financial model:

• Business owners and entrepreneurs
• Finance and accounting professionals
• Financial modelers and consultants
• Individuals for personal finance

And these are the areas where they need financial models:

• Forecasting future raw materials
• Valuation of security
• Benefits of a merger
• Check the size of market opportunity
• See the roadmap to profitability
• Quantity and predict risk
• Portfolio performance
• Identify undervalued securities

Now the real question is why do you need to design financial models?

Well some entrepreneurs may think that financial models are just a formality, but the reality is that financial models can be essential tools for creating and analyzing the road map, an entrepreneur should follow. Here are some reasons for making a financial model:

1. The running cost in the model can help you to determine how long you can run the business without revenue.
2. It can help you in predicting that; when your business will start bringing in more cash, which is known as positive cash flow.
3. As you will begin to run your business and some of your assumptions prove to be inaccurate, you can update the model to understand your current situation.
4. If you make an effective plan and when your business is functioning then you can understand the impact of change in your plan and you can mitigate the risk easily.

Now you know the value of creating a good and effective business model so do not ignore designing it for you, and if you get any problem in creating it, do not forget Infocrest is always there for you.

If you want to learn financial modeling, remember we are soon launching our financial modeling course.