![\"financial](\"/images/cms/MicrosoftTeams-image-34-1024x684.jpg\")
Developing a financial plan (i.e. financial model) is an essential step in the process of creating a comprehensive business plan, setting goals and evaluating the performance against those set goals. A financial model is a tool used to forecast future financial performance based on historical data and assumptions about the business.
\n\n\n\nLet’s face it, developing a comprehensive financial plan for a company is no easy feat. There are numerous factors that must be taken into account, such as:
\n\n\n\nDeveloping a comprehensive financial plan that accounts for all of these factors can be incredibly time-consuming and requires a significant skill and investment of resources.
\n\n\n\nTo tackle this challenge, many companies turn to specialized strategy or financial consultants, if they can afford their services. These consultants are typically from Big 4 firms or similar, and are specially trained to develop complex spreadsheet models and perform financial analysis. They bring a wealth of knowledge and expertise to the planning process, helping companies develop a plan that is comprehensive, logical, flexible, and accurate.
\n\n\n\nHowever, the expertise and services of these consultants come at a steep cost. A single financial plan exercise can quickly cost $50,000 or more, making it a significant investment for any company. Despite the high cost, many companies are willing to make this investment, recognizing the importance of having a high-quality financial plan. A well-crafted financial plan can help companies achieve their financial goals, set clear targets for their employees, measure performance, identify new opportunities for growth, and stay ahead of the competition.
\n\n\n\nAnd after the consultants complete the financial model, changing it at a later stage becomes impossible for the company. The financial model was built in excel, by experts in financial modeling, so they made it quite complex.
\n\n\n\nModeliks is here to change this narrative, and give YOU and everyone else with a small or medium sized business, or a startup, the ability to develop such a plan yourself, without being a spreadsheet expert and without depending on consultants.
\n\n\n\nLet’s now get started with understanding the financial planning process. We will cover the following topics:
\n\n\n\nBy the end of this article, you will have a solid understanding of the steps involved in developing a financial model and how to use it to make informed business decisions.
\n\n\n\nThe first step in developing a financial model is to identify the purpose of the model. What are you trying to achieve with the model? Are you looking to forecast future revenue and expenses? Are you trying to determine the viability of a new business idea? Do you want to set up targets for your employees? Are you planning to share it with potential investors? Will you use it to request a loan from a bank?
\n\n\n\nOnce you have identified the purpose, you can then determine the structure of the financial model, the level of detail and complexity required. For example, a financial model used to evaluate the potential return on investment for a specific project may require more detail and complexity than a financial model used to request a loan from a bank.
\n\n\n\nThe next step is to define the structure of the financial model. This involves determining the level of detail you will want to have in your model, including:
\n\n\n\nIt is important to consider what financial outputs are relevant to your business and to include them in the model. However, you should also be careful not to include too many metrics, as this can make the model unnecessarily complex and difficult to use.
\n\n\n\nOnce you have identified the purpose and structure of the financial model, the next step is to gather relevant data. Gathering data at this stage helps with knowing what data is available so that you can build your financial model based on that data. This includes historical financial data, as well as any other data that may be relevant to the model.
\n\n\n\nExamples of historical financial data include income statements, balance sheets, and cash flow statements. Other data that may be relevant to the model includes market research, industry trends, customer data and operational metrics.
\n\n\n\nIt is important to ensure that the data you gather is accurate and reliable. This will ensure that the financial plan is as accurate as possible.
\n\n\n\nThe next step is to define the assumptions, or the drivers of your financial model. Assumptions are the inputs into your financial model that “drive” the future financial results. This is why assumptions are also called drivers. Examples of business drivers include sales growth rates, gross margin, number of employees, operating expenses, etc..
\n\n\n\nAssumptions are the most important part of the financial model because they drive all the calculations and have the highest influence on the planned financial results. However, it is important to ensure that the assumptions are realistic and based on relevant data.
\n\n\n\nThe next step is to build the financial model. You would now create all the formulas for calculating each line in your financial statements. All revenues, costs, assets, liabilities and cash flows will be linked with formulas to the assumptions, or drivers, that you defined earlier as inputs into the model.
\n\n\n\nUntil now, this involved creating a spreadsheet that links all of the financial outputs of the model with the drivers (inputs) you have created. In order to build your model in a way that accurately reflects the realities of your business and its interdependencies, you will need to build in a significant degree of linkages and formulaic dependencies into your model.
\n\n\n\nModeliks now allows exactly that, for you to build your financial plan based on the specific value drivers of your business, without the need of building your financial model in a spreadsheet and creating thousands of formulas.
\n\n\n\nLet’s understand what a driver-based financial model is and why it matters.
\n\n\n\nDriver-based financial planning is a process of identifying the key activities (also known as ‘drivers’) that have the highest impact on your business results, and then, building your financial plans based on those activities. When you can measure and influence these activities, you can successfully manage and grow your business.
\n\n\n\nDriver-based planning is important because it allows you to establish relationships between the financial results and the resources that you need to achieve those results (like people, marketing budgets, equipment, etc.). By connecting your financial plans to the resources required for each activity, you can allocate the right resources to achieve your goals.
\n\n\n\nExplaining this better, let me take you through an example. Let’s say that you have a SaaS software business, like Modeliks, with a target to achieve 1 million revenue next year.
\n\n\n\nThe key drivers for reaching this revenue target could be the number of clients you need, multiplied by the average price a client pays for your software. But then, the number of clients depends on two different drivers, which are, the number of leads you need to generate, and the conversion rate from a lead into a customer. Now, the number of leads will determine how many sales employees you need.
\n\n\n\nThe number of leads will also determine the marketing budget that you need to attract those leads. And, the number of clients will determine how many customer support people you need. You get the point. The 1 million revenue target drives a whole set of operational activities and required resources. A driver based financial plan allows you to logically connect all the operational activities and resources to the financial targets. And if you change your revenue target, all other resource budgets will automatically and logically change.
\n\n\n\nFinally, driver-based planning helps you set operational targets to your employees that they can control and feel accountable for. It also allows you to review your business performance along those drivers and know exactly which operational processes work well, and where you need to improve.
\n\n\n\nWhen building the model, it was always important to ensure that all of the formulas and calculations are accurate. You should also include clear instructions and labels to make the model easy to use.
\n\n\n\nOnce you have built the financial model, the next step is to validate it. This involves comparing the projections made by the model to actual financial performance.
\n\n\n\nOne way to validate the model is to compare the projections to historical financial data. This will help you determine how accurate the model is and identify any areas where the projections may be too optimistic or too conservative.
\n\n\n\nIt is also important to validate the model by testing different scenarios. This involves changing some of the assumptions and seeing how this impacts the financial projections.
\n\n\n\nValidating the model is an important step as it helps ensure that the projections made by the model are as accurate as possible. Before Modeliks, validating your model will likely have brought out many different coding issues in your spreadsheet model, which in turn take many hours or even days to fix. Today, with Modeliks, you can focus on what is really important – your business – and leave the technical formulae and background calculations, summary tabulations and balance sheet and cash flow calculations to the Modeliks tool to take care of.
\n\n\n\nYour validation work will move from fixing linking errors towards running different business scenarios.
\n\n\n\nThis is the next level and the future of financial model validation, and will enable you to make informed decisions about the business today and in the future.
\n\n\n\nOnce you have validated the model, the next step is to perform a sensitivity analysis. A sensitivity analysis involves testing how changes in one or more assumptions will impact the financial projections.
\n\n\n\nWithin Modeliks, you can run scenarios at the click of a button, whether you want to simulate increases or decreases in revenue due to changes in conversion or penetration rates, or by running profitability scenarios with varying marketing mixes and customer acquisition costs. All within Modeliks’ easy-to use interface, and presented to you with pre-defined charts that should cover 99% of your needs, while also giving you the flexibility to define your own output metrics and dashboards.
\n\n\n\nPerforming a sensitivity analysis is important as it helps identify the areas where the business is most vulnerable to changes in assumptions. This will enable you to develop strategies to mitigate any risks and ensure the financial health of the business.
\n\n\n\nDeveloping a financial plan is an important step in the business planning process, setting targets, and evaluating the financial performance of a company.
\n\n\n\nUp until recently, most financial plans were done in a spreadsheet. Developing a financial model in a spreadsheet is standard practice because most people are used to using spreadsheets. Also, there were no financial planning tools available (or affordable) to small and medium size companies.
\n\n\n\nDeveloping a high quality financial plan in a spreadsheet is actually a difficult and time consuming task:
\n\n\n\nThe alternative to spreadsheets are financial and business planning tools like Modeliks. Modeliks solves the issues that come with using spreadsheets, while providing step by step guidance on creating a professional, accurate and thought through financial plan.
\n\n\n\nIt is important to ensure that the financial plan is logical, driver-based and, as accurate as possible, because too many business decisions will be made based on that plan. You will set targets for all your employees and track your performance based on the plan. You will make investment decisions. You might even request funding based on it. There is too much at stake when creating a financial plan. Make sure you do it right.
\n\n\n\nFor small business owners, managing finances is critical, especially when facing challenges like insolvency. Knowing how to recognize insolvency risks, manage cash flow, and make informed decisions can be the difference between turning a business around and closing its doors. This guide covers essential advice on insolvency for small business owners, including warning signs, managing creditor relationships, and exploring solvency solutions.
\n\n\n\nInsolvency occurs when a business can no longer meet its financial obligations. The two primary indicators are failing to pay debts as they fall due (cash flow insolvency) and having more liabilities than assets on the balance sheet (balance sheet insolvency). Early signs include increasing creditor pressure, accumulating unpaid bills, or relying on additional borrowing to cover daily expenses. Spotting these warning signs early can help you take proactive steps to address financial issues.
\n\n\n\nInsolvency and solvency represent opposing financial states. While solvency reflects a business’s ability to meet its long-term obligations, insolvency indicates an inability to do so. A solvent business has a positive balance of assets over liabilities, meaning it can sustainably manage its debt. In contrast, an insolvent business cannot cover its liabilities and may face significant legal or financial repercussions. Regularly reviewing solvency ratios and financial statements can provide an ongoing assessment of your business’s financial health.
\n\n\n\nEffective cash flow management is key to reducing insolvency risk. Prioritize immediate financial obligations and reduce unnecessary expenses. Monitor cash flow by creating a forecast to identify potential shortfalls. Regular cash flow assessments can reveal trends, such as seasonal fluctuations or unexpected expenses, helping you make informed decisions on timing payments or cutting costs. Implementing cash flow management practices strengthens solvency by ensuring you can cover both short-term and long-term expenses.
\n\n\n\nWhen a business faces financial challenges, avoiding wrongful trading is important. Wrongful trading occurs when a company continues operating and accumulating debts despite clear insolvency. Directors who knowingly incur additional debts without reasonable grounds to believe the company could avoid them can be personally liable. To prevent wrongful trading, assess the financial position of the business honestly and consult a licensed professional if necessary.
\n\n\n\nAddressing creditor relationships proactively is critical in an insolvency situation. Avoid ignoring creditor communications, as open discussions may lead to alternative arrangements, such as extended payment terms or a Company Voluntary Agreement (CVA). A CVA is a binding agreement that allows your business to repay debts over a set period, often with a reduction in the overall amount due. Creditors are generally more willing to cooperate if they see you taking steps to manage finances and minimize losses.
\n\n\n\nDebt restructuring can be a viable option for businesses experiencing financial distress. This can include consolidating debts, negotiating new payment terms, or securing short-term financing to meet pressing obligations. Debt restructuring helps manage immediate liabilities and shows creditors your commitment to managing finances responsibly. Ensure that any restructuring plan aligns with your business’s solvency goals to prevent further insolvency risks.
\n\n\n\nIf your business cannot recover from insolvency, consider formal options like voluntary liquidation or administration. Creditors’ Voluntary Liquidation (CVL) is a process where an insolvent company chooses to close down to address outstanding debts. In this process, a licensed insolvency practitioner manages the sale of assets to repay creditors.
\n\n\n\nAlternatively, the administration can provide temporary relief from creditors while restructuring or selling parts of the business. This is managed by an administrator, who aims to maximize creditor repayments and preserve the company’s viable sections. Both options offer structured approaches to insolvency, focusing on creditor repayments and business stability.
\n\n\n\nInsolvency is a significant challenge, but understanding the signs, managing cash flow, and engaging with creditors can make all the difference. Take action as soon as possible if your business faces financial distress. Proactive steps toward financial stability, such as debt restructuring or formal insolvency solutions, can help you avoid long-term consequences.
\n\n\n\nReady to secure your business’s future? Discover how Modeliks tools, expert financial insights, and strategies can help you manage your company’s solvency and protect your assets. Start your free trial today!
\n","slug":"insolvency-advice-for-small-business-owners","date":"2024-10-28T10:36:39","categories":{"nodes":[{"id":"dGVybToxNA==","name":"Financial Forecast"}]},"mainCategory":{"mainCategory":["financial-forecast"],"videoHeader":null},"tags":{"nodes":[{"name":"business planning"},{"name":"financial forecasting"},{"name":"financial reporting"}]},"featuredImage":{"node":{"id":"cG9zdDo1NjU2","sourceUrl":"/images/cms/Modeliks-3.jpg","altText":"Modeliks Guide on managing insolvency for small businesses, covering cash flow, creditor relationships, and solvency solutions"}},"seo":{"metaDesc":"Strategies to manage insolvency, from recognizing warning signs to improving cash flow and managing creditor relationships for stability."},"modified":"2024-10-28T10:36:40","related":null},{"id":"cG9zdDo1MzUw","title":"Elasticity in Economics: Types, Formulas & Importance","content":"\nUnderstanding elasticity in economics is crucial for businesses, economists, and policymakers. It measures how sensitive one variable is to changes in another, providing insights into consumer behavior, market dynamics, and the effects of pricing strategies. This article delves into the concept of elasticity, its various types, formulas, and its significance in both economics and finance.
\n\n\n\nElasticity is a fundamental concept in economics that quantifies the responsiveness of one variable to changes in another variable. In most cases, it refers to how the quantity demanded or supplied of a good or service responds to changes in price, income, or other factors. By understanding elasticity, businesses can make informed decisions about pricing, production, and marketing strategies.
\n\n\n\nElasticity helps businesses and policymakers predict how changes in economic variables will affect supply and demand. It allows companies to anticipate consumer reactions to price changes, adjust production levels, and optimize revenue. For policymakers, understanding elasticity aids in designing effective taxation policies, subsidies, and regulations.
\n\n\n\nThere are several types of elasticity in economics, each measuring responsiveness to different variables. The main types include:
\n\n\n\nPrice elasticity of demand measures how much the quantity demanded of a good changes in response to a change in its price. It indicates the degree to which consumers adjust their purchasing behavior due to price fluctuations. Here’s the formula:
\n\n\n\nPrice Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
\n\n\n\nLet’s break this down:
\n\n\n\nFor example, if the price of a product increases by 10% and the demand decreases by 15%, the price elasticity of demand is:
\n\n\n\nPrice Elasticity of Demand = (-15%) / (+10%) = -1.5
\n\n\n\nThis means the good is elastic since the elasticity value is greater than 1.
\n\n\n\nPrice elasticity of supply measures how much the quantity supplied of a good, changes in response to a change in its price. It reflects producers’ responsiveness to price fluctuations. Here’s the formula:
\n\n\n\nPrice Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)
\n\n\n\nBreaking it down:
\n\n\n\nFor example, if the price of oil increases by 8% and the supply increases by 4%, the price elasticity of supply is:
\n\n\n\nPrice Elasticity of Supply = 4% / 8% = 0.5
\n\n\n\nThis means the supply is relatively inelastic since the elasticity value is less than 1.
\n\n\n\nIncome elasticity of demand measures how the quantity demanded of a good changes as consumer income levels change. It helps classify goods as normal or inferior. Here’s the formula:
\n\n\n\nIncome Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Income)
\n\n\n\nBreaking it down:
\n\n\n\nFor example, if income increases by 20% and the demand for a luxury product rises by 40%, the income elasticity of demand is:
\n\n\n\nIncome Elasticity of Demand = 40% / 20% = 2
\n\n\n\nThis indicates a high sensitivity to income changes, typical of luxury goods.
\n\n\n\nCross elasticity of demand measures how the quantity demanded of one good changes in response to a price change of another good. It indicates the relationship between complementary and substitute goods. Here’s the formula:
\n\n\n\nCross-Price Elasticity of Demand = (% Change in Quantity Demanded of Good X) / (% Change in Price of Good Y)
\n\n\n\nLet’s break this down:
\n\n\n\nFor example, if the price of tea rises by 10% and the demand for coffee increases by 5%, the cross-price elasticity is:
\n\n\n\nCross-Price Elasticity = 5% / 10% = 0.5
\n\n\n\nThis positive value suggests that tea and coffee are substitute goods.
\n\n\n\nSeveral factors influence the elasticity of demand and supply:
\n\n\n\nUnderstanding elasticity is essential in finance for pricing strategies, revenue forecasting, and investment decisions. Businesses use elasticity to predict how changes in price or income levels affect sales volumes and revenues. In elasticity finance, companies analyze elasticity to optimize pricing, maximize profits, and maintain a competitive edge.
\n\n\n\nBy analyzing the price elasticity of demand, firms can identify the optimal price point that maximizes revenue without losing customers to competitors.
\n\n\n\nElasticity plays a vital role in various economic analyses:
\n\n\n\nElasticity informs businesses and policymakers about consumer behavior and market dynamics. It aids in:
\n\n\n\nBy understanding elasticity in economics, stakeholders can make data-driven decisions that align with market realities and consumer preferences.
\n\n\n\nElasticity is a cornerstone concept in economics and finance, offering valuable insights into how variables like price and income affect supply and demand. By mastering the different types of elasticity and their implications, businesses and policymakers can make informed decisions to optimize outcomes.
\n\n\n\nLooking to leverage economic insights for your business success? Contact Modeliks today to discover how our expertise and tools can help you make strategic decisions that drive growth and profitability. Start your free trial today!
\n","slug":"elasticity-in-economics","date":"2024-10-21T12:42:24","categories":{"nodes":[{"id":"dGVybToxNA==","name":"Financial Forecast"}]},"mainCategory":{"mainCategory":["financial-forecast"],"videoHeader":null},"tags":{"nodes":[{"name":"financial forecasting"},{"name":"financial modeling"},{"name":"financial reporting"}]},"featuredImage":{"node":{"id":"cG9zdDo1MzUz","sourceUrl":"/images/cms/Modeliks-2.jpg","altText":"Modeliks Guide: Explaining elasticity in economics, showcasing price, income, and cross elasticity for effective financial decisions."}},"seo":{"metaDesc":"Elasticity in economics and its types—price, income, and cross elasticity—helping businesses make informed pricing and market decisions."},"modified":"2024-10-21T12:42:25","related":null},{"id":"cG9zdDo1MzU4","title":"Accounting for Small Businesses: Guide to Managing Finances","content":"\nManaging your small business finances is key to long-term success. Whether you’re just starting or looking to improve your current processes, implementing an efficient accounting system is critical. Accounting for small businesses helps you track income, manage expenses, prepare taxes, and make informed financial decisions. This guide will walk you through the essential steps of financial management to ensure that your business is on the right path.
\n\n\n\nAccounting for small businesses plays a vital role in ensuring financial stability. It allows you to monitor cash flow, assess profitability, and stay compliant with tax regulations. With proper accounting systems, you can avoid common financial pitfalls and gain a clearer picture of your business’s performance. It also helps streamline decision-making by providing accurate financial data that you can rely on for both short- and long-term planning.
\n\n\n\nGetting your accounting system in place involves several key steps, starting with opening a separate business bank account to keep your personal and business finances separate. You will also need to choose an accounting method—either cash or accrual accounting. For many small businesses, the cash method is simpler and easier to manage, while accrual accounting provides a more comprehensive view of your financial health.
\n\n\n\nAnother important step is setting up a chart of accounts, which categorizes every transaction your business makes. This will help you organize your assets, liabilities, revenue, and expenses in a structured way, making it easier to track and manage your finances. Finally, establish a fiscal year, which could either follow the calendar year or be customized to suit the specific needs of your business.
\n\n\n\nEffective bookkeeping is the backbone of your accounting process. Small business bookkeeping involves tracking daily transactions, maintaining financial records, and keeping organized documentation of receipts and expenses. One of the most critical tasks is reconciling your bank statements regularly to ensure your records match what’s in your account. Accurate small business bookkeeping helps prevent errors and makes tax preparation much smoother.
\n\n\n\nMany businesses opt to use accounting software to automate these processes. This type of tool can simplify tracking and help you generate financial reports with ease. It also reduces the likelihood of human error and saves time on repetitive data entry tasks.
\n\n\n\nFinancial statements provide a snapshot of your business’s financial health. The three most important ones are:
\n\n\n\nThese reports are essential for understanding your business’s financial standing and are often required when applying for loans or presenting your business to investors.
\n\n\n\nFor small businesses, tax planning is crucial to avoid penalties and maximize deductions. Understanding your tax obligations—such as income tax, self-employment tax, and payroll taxes—is essential. Staying on top of estimated quarterly tax payments helps prevent surprises when tax season arrives. Tracking deductible expenses, like home office costs, business travel, and vehicle expenses, can also reduce your tax liability.
\n\n\n\nConsider working with a tax professional or using accounting software that simplifies tax calculations and filing. This ensures accuracy and helps you stay compliant with all tax regulations.
\n\n\n\nAs your business expands, you may wonder whether to handle accounting in-house or outsource it. Outsourcing can be more cost-effective for small businesses without complex financial needs, as it gives you access to accounting expertise without the overhead of hiring a full-time employee. On the other hand, in-house accounting offers more control and real-time access to your financial data. Many businesses find a hybrid approach works best—outsourcing more complex tasks like tax preparation while managing day-to-day bookkeeping internally.
\n\n\n\nProper financial management is the foundation of success for any small business. By setting up an efficient accounting system, keeping detailed records, using reliable accounting software, and understanding your tax obligations, you can ensure your business remains financially healthy and positioned for growth.
\n\n\n\nReady to take control of your small business finances? Discover how Modeliks can help streamline your accounting and financial management systems. Start your free trial today!
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