Building a good financial model isn’t easy. Many companies spend countless hours trying to get their Excel-built model just right.
Here are 3 Signs That Your Financial Model Is Flawed
The purpose of building a model is two-fold: first it lets potential investors know that you have made an attempt to project the potential performance of your business, understand what the cost drivers are and (hopefully) identify key risks in the business model. Secondly, it helps you link strategic thinking to the nitty gritty of making enough money each month to pay your bills.
I’m pitched on potential investments regularly. Beyond looking at the big picture, I also take a look at the details of the company’s financial models. What are their assumptions? Are they realistic? Do the patterns in costs and revenues make sense given the typical progression of a business and given the industry? Through this process I see some mistakes over and over again. These mistakes are “tells” which let me know that the founders either haven’t thought everything through or they have prepared the model hastily and may have other problems.
Want to read more about building a financial model? Check these out:
Before sending your model to anybody (investor or not), make sure that these “tells” are resolved.
First tell: Accounts receivable and accounts payable are ignored
Including A/R and A/P in an Excel model does add an additional layer of complexity. You have to adjust for the difference between when you make the sale or incur the expense and when the cash actually comes in or goes out. This means that your cash flow statement and your balance sheet need to take this into account.
The most correct way to model it would be to include in your assumptions sheet your standard payment terms. It could an A/R assumption of 60 days and an A/P assumption of 45 days. This assumption should then filter through to your monthly projections.
Go to the article: 3 Signs That Your Financial Model Is Flawed
