Most of us have heard the saying that goes, "If you fail to plan, then you might as well plan to fail." There is much truth to that statement.
To succeed in today’s business world, you must be part scientist, part artist and part analyst, blending these three competencies into the development of a business model that helps you choose a strategy to capture greater market share while enhancing profitability.
The importance of modeling financial scenarios for your business cannot be emphasized enough. Whether you are a CEO, a CFO or a department head, putting together a set of projected financial models couldn’t be more important to helping the business leader set the course for their organization’s financial future.
Many companies struggle with the discipline of financial modeling.
If you have a financially successful business (large or small), it is highly likely you have taken the time to create a financial model (or plan) describing the long-term financial impact of selected business strategies. The problem is, in many smaller to mid-sized companies, financial modeling is often non-existent.
It’s a corporate habit that creates forward visibility, which ultimately enables the company to achieve greater levels of financial success. Financial modeling provides business leaders with the ability to test the financial viability of their strategic assumptions. Financial modeling helps business leaders better understand the cause-and-effect relationship between one growth strategy vs. another.
All too often, the owners of small to medium-sized businesses decide to make a significant investment without documenting and analyzing the cause-and-effect relationship of their investment assumptions.
It’s important to take a long-term look at the anticipated impact that economic and market conditions, competitive forces and other risk factors may or may not have on your business. These assumptions must be committed to paper in the form of a financial model or plan.
Financial modeling enables you to challenge your own assumptions using hard numbers. This discipline and corporate habit creates forward visibility for your organization.
Business leaders often struggle with the discipline of financial modeling. It seems they struggle because of a handful of common obstacles:
1. They don’t have enough time to create financial models.
2. They have difficultly temporarily removing themselves intellectually and emotionally from the day-to-day operations in order to focus on the future.
3. They have limited experience and/or capability in internal modeling.
Every year, some of my clients decide they want to concentrate on making sure the decisions and assumptions they have made will aid in accelerating the market value of their organization. This is a turning point for these business leaders, because they are beginning to understand the power of building financial models. At that point, their interest in financial modeling has peaked, and they become captivated with creating multiple financial models to demonstrate the various ways they can enhance their earnings, ultimately enhancing the overall market value of their organization.
Financial modeling should not be something that is only done once in a blue moon. Nor should it occur only when an owner is preparing a business for sale. Long-term financial modeling should occur each and every year. This really should be part of the strategic planning process, demonstrating that the strategic assumptions made will truly lead the organization to the results they desire.
No matter the nature of your business, your chances of success will be greatly enhanced if you prepare a three- to five-year financial plan, which starts with financial modeling. When planning long term, building various financial models provides corporate leaders the opportunity to poke holes in assumptions such as the impact of changing the current product/service mix or pricing models, expansion, contraction and acquisition decisions, etc.
Flexible, real-time financial models help business leaders navigate through economic and industry changes. If you’re not sure how to get started, ask your friendly business advisor or CPA for assistance.
Philip Mydlach is the owner of Mydlach Management Advisors, a corporate planning and performance improvement practice in New Berlin. He can be reached at (262) 662-4646 or pmydlach@aol.com.
May 27, 2005, Small Business Times, Milwaukee, WI
