If you have questions about your business and its future performance that you would like answered, a financial model is a powerful weapon in your armoury. We all know the future is uncertain, so no-one expects a model to be a crystal ball. The real benefit of a model is that is simulates your business, enabling you to test different versions of the future to see what the financial outcomes are likely to be. This is a powerful tool in decision making. To be able to achieve this, a model needs to be well designed, flexible and robust, so that it can answer the questions you want to ask. Building models that can answer your questions is what we do.
Our use of the term “financial modelling” describes an Excel workbook that represents a business or similar organisation, in order to support decisions or to summarise financial reports. There is usually a time dimension, which is forecast into the future for anything from a few months to several years, depending on the nature of the decisions to be taken. Typical outputs will be a dashboard summarising key indicators, financial statements, graphs and other useful metrics. A model may be purely for forecasting, or it may contain historical figures, or both.
Financial models are effectively a very specialised calculator – you enter some ‘inputs’ - assumptions about what you think might happen, and the model processes these to give a set of outputs (these may be forecast financial statements, a price, a valuation). The way the inputs are processed to generate the outputs is defined by the logic contained within the model. You can think of most financial models as a business simulator – A model aims to represent how the operations and finances of an organisation behave, so that we can feed in ‘scenarios’ (ie sets of assumptions) and see what the financial outcomes would be. Whilst most of the models we deal with are to produce a financial forecast, we deal with other types of spreadsheets as well – this is described more under ‘data analytics’.
Good Corporate governance dictates that decisions should be supported by sound analysis. Decisions often requires forecasts as the basis for:
• analysing the benefits and costs of a project
• establish a price for a bid,
• establish the value of a company
• investment or lending decisions
• Corporate transactions (Mergers, Acquisitions, disposals, IPOs)
These decisions often involve huge sums of money, so the analysis needs to be robust. Models support mission-critical decisions. You need to be able to run and compare scenarios to test their financial impact and you need to have confidence in the output. Despite this, many companies use an in-house finance resource with no specialist training. There is a big difference between being proficient with Excel (which many people are) and being able to build a robust financial model (which is what we specialise in). You need a model that inspires confidence in your team, your investors and your lenders. This confidence can be shattered if the model is not robust and throws up errors when assumptions are changed.
Numeritas has been building robust financial models since 2003. We are the only independent modelling firm with a modelling team predominantly consisting of qualified accountants. That is why the large accounting firms refer work to us for corporate transactions. We also have extensive deep expertise in project finance modelling and many other related analytical and forecasting techniques.
Most businesses and other organisations are highly complex, with lots of inter-relationships. The secret of a good model is to balance the need to represent this complexity with the availability of good data (ie assumptions). If a financial model is too simple, it doesn’t reflect the way the business operates. Too complex and it becomes unwieldy and will often end up gathering dust. Many complex problems can be broken down into smaller, simpler sections to make them easier to understand.
A critical factor in a successful modelling project is to understand the needs of the stakeholders before the design and build stages are undertaken. Numeritas has a strong consultative element to our approach, so that you get what you need now and so that you can adapt the model for future needs.
We use a well-tested approach, including best practice principles to minimise errors, maximise flexibility and achieve user friendliness. You can find out more about our approach in the following video:
Book a call with one of our team to find out how a model can give you a better understanding of your business and lead to better decisions.