Three Financial Modeling Mistakes You Should Avoid
Are you using MS Excel to track and manage your finances?
You probably begun the management of your business finances using MS Excel spreadsheets to determine income, expenses, and profits. As your business grows, it becomes necessary to probe the numbers deeper, using financial information to make assumptions about your financial future, and determine performance.
A financial model is a tool that is used to forecast the future financial performance of your business. It analyses the information on your three main financial statements being the income statement, balance sheet and cash flow statement. Using this information, you can make informed decisions for your business.
Even so, any mistakes in the financial model can lead to frustration or inaccurate information that affects the business. As you prepare your financial model, you should be aware of these possible mistakes: –
1. Accuracy First
With every number that you put into your financial model, check to confirm that it is accurate. Small mistakes like exchanging a positive number for a negative one can have detrimental results.
This also applies to formulas or circular references that are necessary for calculating totals. Where necessary, use parenthesis.
2. Missing the Financial Summary
Your financial model is a detailed tool, and for ease of understanding, you need a financial summary. This will offer a snapshot of all the results from the model, as well as the assumptions used in the calculations.
3. Link your Financial Statements
All your financial statements are interconnected, giving a comprehensive understanding of your financial position. For example, the cash in the opening of your balance sheet feeds into the beginning of your cash flow statement. Your net income is part of the retained earnings in your profit and loss statement and then feeds back into your closing balance sheet. Use this understanding to ensure your numbers correlate and are accurate.
Your financial model is an excellent tool to use as a wellness check for your business. There are templates available that you can use, though it would be of greater benefit to have a model that caters specifically to your business and your unique needs. Engage with a professional accountant from RCN Accounting & Business Advisors to develop your unique finance model. Book a discovery call through www.rcncpas.com to find out how to get started.
