In our opinion, every business should prepare a detailed financial model that demonstrates forward looking (illustrative) Profit & Loss Accounts, Balance Sheets and Cash Flow Statements.
There is simply no reason not to: if things are going well, detailed forecasting can help plan for further growth (i.e. effect of investment of excess cash / fundraising / planned acquisitions); if things are not going so well then it helps identify pinch points so that corrective measures can be taken (be it use of loans/overdrafts or changing working capital management).
We prepare models using Excel spread sheets. There are specific forecasting programmes available, however Excel provides the flexibility to enable preparation of models that are bespoke to the business in hand.
We build all models from scratch, based on the requirements of the user
A robust financial model will demonstrate the following:
- 24-60 month horizon.
- Detailed summary page of assumptions including but not limited to:
- Revenue / gross profit by product;
- Debtor / creditor days;
- Fixed asset additions; and/or
- Financing options.
- Full integration – by adjusting an assumption, the P&L, Balance Sheet and Cash Flow Statement should all update automatically.
- Detailed workings available for review if required (employee lists; debtors control account, etc).
- Concise outputs page for ease of use by the user.
We know what makes a good model because we have prepared or reviewed hundreds of them – on behalf of companies; trustees; banks; private equity houses; and Nominated Advisers (“Nomads”).
Internal vs external use
Whether prepared for the Board or an outside party (such as a bank that is considering a facility), the purposes are the same:
- Based on our expectations, what is the cash/profit/balance sheet position in 6/12/24 months’ time?
- How does future performance compare to historic? If there is significant change, why?
- Sensitivity analysis – if you make most of your purchases from the United States, what is the impact of a 10% weakening in the pound?
- Scenario analysis – if we create a new ‘Head of Sales’ role and hire Mrs X on £X per year basic plus X% commission, and the result is a 5% increase in turnover, how does that compare to doing nothing?
Management Information (MI)
As discussed here, actual monthly results versus forecast (and variance analysis) should be a key part of any company’s monthly MI.