This presentation provides an understanding of what financial modelling is and how it is used. Moreover it covers the basic approach for creating financial models and utilising them as needed.
The Triple Threat | Article on Global Resession | Harsh Kumar
Session 1-Financial Modelling
1. What is Financial Modelling?
Overview of financial statements
Planning vs modelling
The ‘what if’ mind-set
The importance of assumptions
Dealing with uncertainty
What does a financial model communicate?
Market metrics such as conversion rates
2. The Financial Statements
Financial Statement Overview
Income statement or Profit or Loss Statement How much money we have or will have made and
spent over a period of time?
Shows Financial Performance
Statement of Financial Position or Balance Sheet How many valuable things we own and how many
things do we owe plus what is our equity
(shareholdings+ money made & held till date) at a
chosen point in time?
Assets= Liabilities Equity
Shows Financial Health
Cash Flow Statement How much cash has entered and exited in the
business?
What is the net cash flow over a period of time?
Capitalisation Table How have we distributed our equity between founders,
employees and investors?
Pre money valuations and Post Money valuations
Shows rounds of funding and results
3. Planning Vs Modelling
Planning Modelling
Process of creating an action plan Process of creating and valuating assumptions
Based on targets Based on assumptions and variables
Input or Output Driven Input Driven
Part of a Business Plan Mostly Guides Business Planning
Steps are outlined to achieve goals Presents how the goals set will create value
Establishes the outcomes on intentions, more based
on ifs than what ifs
Explores what ifs and the outcomes
Explains the steps needed to achieve goals Explains how the steps taken will generate an
outcome
4. The “what if” mind set
The process of thinking through scenarios and asking questions on a range of well
thought out assumptions
Enables validation of assumptions used for the financial model
Enhances understanding of the business and financial model
Adds flexibility to the financial model by changing inputs
Shows effects of completing set goals and milestones based on how well they will
be achieved
5. The Importance of Assumptions
Assumptions are the basic map for creating any model
The assumptions decrease uncertainty
The financial model is as good as the assumptions used to build the model
Assumptions are the key to achieving “buy in” from investors, partners and employees
Assumptions guide not only the financial but also business modelling & planning
Assumptions have to be well thought out, researched and tested
6. Dealing with uncertainty
Uncertainty is the fear of the unknown
or the risk faced from variables that are not accounted for
and those variables that cannot be evaluated
Uncertainty is reduced through assumptions, modelling and research
Uncertainty is reduced as assumptions add some level of certainty
A model that responds to range of inputs decreases uncertainty
Uncertainty is productive as it keeps us sharp and prepared!!!!
7. What does a Financial Model
Communicate?
It shows that you understand your business and how it works.
It shows how your assumptions and plans will generate value
It allows investors to evaluate some aspects of your business
It shows how a range of inputs will impact on the outputs i.e profits and costs
It shows how your business will likely perform over a period of time
A good financial plan shows that you have had a reality check and are not working on
guesses and blind devotion
8. Importance of Marketing Metrics
Your key assumptions will be based on how your marketing will work?
How do you plan to reach your target market?
How do you plan to turn your target market into customers?
How much time and cost will you incur in the process of gaining customers?
How much value will each customer add to your business?
What are the expected range of conversion rates for marketing efforts of your business?
9. Summary
The financial model is expressed through financial statements.
Financial models are dynamic, assumption based and input driven.
Financial models are built with a “what if” mind-set.
Financial models deal with uncertainty, but do not eliminate it.
Financial models communicate information to aid decision making and planning.
For a start up, marketing metrics drive the creation of the financial modelling.
10. To find out more
Call at +92 333 6401 601
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Email: Riz.khan@bistructures.com
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