Should I Create a Financial Model?
Q: So I’m tracking my company’s financials in Quickbooks, isn’t that enough to run my business?
A: Well, is it wise to drive cross-country by simply heading east, or would you rather do so with a map and an itinerary?
Creating and updating a financial model is an absolute necessity if you want to become an effective, profitable, growing company.
And it really comes down to two simple reasons that high performing organizations create a financial model:
- To predict the future so that you can make decisions informed by business objectives
- To hold teams accountable for their performance vs expectations
Let's dive into each.
Predict the future
What do we mean by “predict the future”? It doesn’t mean looking at your horoscope and hoping for the best. It instead means evaluating your historical spend and income, making connections between the inputs and outcomes of your business, making assumptions about those inputs going forward, and therefore understanding where the set of activities you are undertaking puts your business. Without a future-looking financial model, it is far easier to make suboptimal decisions and underperform your potential.
A model, in essence, is a digital facsimile of your business. This model allows you to then understand what happens to your bottom line if you change pricing, grow faster, hire more employees, step up marketing, or alter any other relevant input. And when you have this information at your fingertips – cause and effect for your business – you can make the decisions that put you in the best position to succeed.
Hold teams accountable
Teams need to know where they are expected to be in order to operate with maximum efficiency. Without financial expectations and a way to track progress against them, teams will undertake work that is less likely to result in the business outcomes the organization is seeking. To continue our earlier driving metaphor, your teams need to know where they need to be and when, and they need to have better directions to get there. Only when leaders are supplied with this information can you objectively measure whether they are furthering the company’s goals.
And when you establish team goals, you align activities amongst members and motivate employees to perform to meet them. You are going to get more out of your resources by producing goals.
Is a company-wide financial model enough?
The answer is… it depends. A single company-wide financial model may be enough if you are a relatively small, less complex business with one product line. In that case, one model is probably sufficient for predicting, goaling, and tracking your company’s progress.
However, if your business is more complex and has multiple work streams going on at any given time, it is likely time to take your company model and break it into segment P&Ls, so that each key decision maker has access to financial information personalized for their job. By sharing distinct segment P&Ls with your operators, you avoid broadly disseminating confidential information such as salaries, and you shield your operators from the items irrelevant to their specific businesses, focusing their attention exclusively on what drives their activities.
Telemetry has created affordable, modern SaaS software that automates the creation and distribution of segment P&Ls. Find out if it’s right for your business by trying it for free at telemetry.fi.
