Why a Business Needs Financial Model?


The financial model is a tool to evaluate the viability of your business. It will help you come up with the decision to continue or not with the investment. The most commonly used financial model is the three financial statements, which are the income statement, balance sheet, and cash flow statement.

So why do you need the financial model for your business? Let’s take a look at some of the reasons why you have to prepare a financial model.

  1. To assess the Viability of the Startup Project. If you have a business idea in mind, you need to determine its viability by preparing a financial model. It will give you the basics of how much you need to start the business, where to source out the funds possibly, and the projected revenue that would be more than enough to cover up the operating costs and the general & administrative expenses. If the results of the financial model make it to the profitability requirement of your industry, then you are good to go, given that you exhaust the possible financial models that are beneficial in assessing the profitability of your proposed project.
  2. The Plan for Business Expansion. Even though you proved to be useful in running the current operation, you still have to evaluate the profitability of the expansion. It would be easier to project this time since you already have the historical data that you can base your forecast from. You can also opt to use more comprehensive and meticulous financial models that can help in the decision-making process now that you already know the ins and outs of your business. The outcome of the financial models will tell you if the business expansion is timely and relevant.
  3. To Source out Funds. Investors, banks, and other funding sources will not just take money out of their pockets to fund your business without showing them that they can earn from their invested capital, or the company can pay for the asked loan. Your financiers need to see in numbers and detailed presentations of how the business operates and what their plans are as the figures dictate. If the numbers prove to be profitable for them, then you already secure the funding for the company. You also have to be clear how you will compensate the investors for their invested money.
  4. Bank Requirement for Your Loan. Most of the banks would require you to submit records and financial projections to make their assessment of your future capacity to pay the loans. They will probably ask these at regular intervals, either quarterly or annually.

If you think preparing a financial model will take up much of your time, there are widely available resources online that you can use. You can save time and effort instead of starting from scratch. eFinancialModels offers just that for they have a variety of financial model templates, you can utilize for your specific industry.