I am just completing an update of a client’s financial forecast model. This occurs on a regular basis as we refine and extend it, as our knowledge and understanding of the business increases and strategy changes are incorporated. I have been involved with this client for 18 months and thought I would take a moment to reflect on this period. Their performance over this period has been phenomenal. Strong volume and profit growth (from a small base to a number in the millions), a value creating acquisition and a business now with significant value.
They credit some of this success to the financial model that I built upon commencing my involvement with them. They now have full visibility to the profitability of individual products and of product categories, customers and sales channels. This has enabled them to focus sales efforts on the more profitable elements of the business, work to reduce costs in some areas and have an understanding of the impact of certain actions on future profit.
The model is detailed – starting at an individual product level and the entry of input costs such as purchases, production, freight, packaging, discounts/rebates and marketing costs to produce a profit for each product. Various summary reports, the ability to run scenarios and the standard 3-way financial reports, namely profit & loss, cash flow and balance sheet are the outputs.
This business had been operating for a number of years before my involvement and hadn’t previously utilised a financial model. It took some time for the CEO to adopt the model and incorporate it into the business’ decision-making process. He is now the biggest user of the model and a version of it is kept live with a link to the production schedule. Their understanding of the elements driving the profitability of their business is now much better, the model gives them much greater visibility and a better basis for decision making.
Over my commercial career I have utilised financial models in every job/ business I have been involved with. To build a model you need to have a good understanding of the operations of a business and I have always found this learning exercise invaluable. The model gives you a view of the future helping to minimise surprises and provides targets to chase and against which actual performance can be assessed.
From my interactions with businesses and their owners over the last 18 months it has surprised me how many businesses do not utilise financial models and incorporate them into their decision-making processes. More surprising is the number of business owners/managers who do not even understand what a financial model is and how it can be utilised to help run a business