Any finance vet will tell you, the key driver to bad analysis is “trash in, trash out”. In other words, you can have the best financial model in the world, but if you only have bad inputs you’re only going to get useless outputs. For your company’s financial model to be a useful tool, you’ve got to regularly ensure your latest prospective deal pipeline, financial transactions, expenses, etc are worked in. When you have reliable inputs in your model, you’ll have a dependable financial forecast that you can use. Not only that, but you’ll have created the necessary accountability every business needs. A model that reflects an up to date sales pipeline will show you what every deal is going to do to your bottom line, and better yet will let you work in probabilities so you can make better estimates of your financial results. This perspective is so powerful because it lets you make sure you’re devoting resources to likely deals, and/or potential points of low capital.
Culturally, the benefit of having your sales pipeline built into your model is invaluable. It contextualizes the importance of deals to each individual sales employee, thereby getting your whole sales department to buy into the overall growth of the company. For someone to not hit their commission cap is a good motivator but seeing what that does to the company’s financial health as a whole will be a much more powerful motivator and enhances the overall culture.
How to create the best financial model for your business
Don’t sleep on market research of your industry. As a player in your field, stakeholders will expect you to understand the dynamics that drive the market and for that to be reflected in not only your financial model, but your business model as well. For example, if potential regulation could increase or decrease your market share, model out scenarios that show what that impact could be. Also understand the potential size of your market, i.e. who would actually use your product? How is that number changing over time? What are factors that could shrink your market, ie substitute products? This research will help you organize your thoughts around your financial model and improve the way you make decisions in your business.
Accurate Historical Data
Remember how eating your vegetables when you were a kid seemed like the worst thing ever? Now, looking back, you realize vegetables helped ensure you didn’t have a heart attack at the age of 25 and you may even enjoy them now.
Although I’m not in the business of giving medical advice, it’s pretty much the exact same thing with the financials of your company.
Very few people enjoy doing month end account reconciliations and digging into journal entries but it’s a necessity for every company, no matter the size. These things are done to avoid lack of useful financial data, the subsequent disorganization, and finally the resulting crippling anxiety. In all seriousness, closing your books at the end of the month should be one of the first practices any company solidifies and maintains. It doesn’t make sense to have month end close data by the time you’re ready to close the next month.
I’ve seen companies not actually close month end until the 15th of the next month, which usually turns into the 20th, at which point they are already starting the process close for the next month and couldn’t speak intelligently about their financials for over 4 weeks. You don’t want to be that person constantly working off stale data. And for the sake of the sanity of the CFO community, make sure you are closing numbers are accurate.
One of the main reasons I started Clockwork is for companies to mitigate as many possible risks when it comes to managing a financial model. You shouldn’t have to run the risk of someone fat-fingering your financials or putting something in wrong that no one else can see.
Few things are worse than entering a 58 instead of 85 and realizing that you made a decision based on a simple mistake in your numbers. One of the things that might be worse is sending out a financials report package or presentation with numbers that are wrong.
This one probably seems like a no-brainer, but make sure your model reflects the current way your company operates. If your business pivots, get into your model and shift assumptions so they reflect your new business model.
It is very rare for any company not to pivot something in the way they operate, whether in terms of customers, markets, employees, etc.
As you choose these key assumptions, understand that they will flow into major other areas of your model. Turning down a key revenue driver like your advertising expenses will affect your revenue growth plans. If you’re looking at taking venture money or have already done that, VCs determine the key growth drivers of a business and infuse cash to ramp it up (like marketing spend or additional sales people).
If you hire additional salespeople, your model should show each person generating a revenue book and ultimately grow your revenue and that should be captured in your financial model. This is what your Key Performance Indicators (KPIs) should be built from. And keep in mind that revenue growth could be accelerated or dampened by things like new market territories, new products, etc.
To learn more about how Clockwork helps small businesses realize and work towards a better financial future, create your account to start a free 14-day trial (no credit card required). Connect your QuickBooks Online or Xero account to create your first financial model in minutes.