When a business is forced to deal with rapidly changing conditions or an uncertain future, an “Interactive Financial Model” is an invaluable tool.
Think of it as a projection for your business, driven by key assumptions that can be easily changed. Use the power of Excel to recalculate a projection of future results based not only on historical trends but your best estimate of what will happen.
What is the value of an Interactive Financial Model?
Key components of a financial model:
Establishing solid assumptions is a key to building a credible financial model.
The more effort you put into your assumptions the more valuable your model will be.
Other assumptions required will vary by business but should include:
Laying this all out in an excel worksheet so that assumptions can be changed to show what happens under different scenarios will make this a powerful tool for managing the business and reacting to changing conditions. For an example of an Interactive Financial Model in Excel format click here.
A key part of the financial plan process is to report actual results against that plan and to investigate deviations to determine if corrective action is required. It is beneficial to periodically update the plan to account for real-life changes in assumptions and business conditions.
Consider saving a copy and updating it with actual results. Then reforecast the balance of the year so you always know what your year-end results will look like.
Creating a model from scratch may seem like an overwhelming task. To begin to gain the value, start with a few basic assumptions and use historic average information for the rest. Each month as you review, you can replace some of the average information with more refined assumptions.