Financial modelling’s key role
In these extraordinary times, there is no such thing as business as usual, for anyone. Many businesses are facing enormous falls in demand; others, with more than they can cope with. We are accustomed to developing financial models for companies that will demonstrate the outcome of a range of scenarios. Many models currently in use by businesses do not have the capability of being efficiently stress-tested, let alone handle the range of scenarios currently being considered that would have stretched our imagination even a month ago. Given our experience in building financial models for forecasting, we have prepared our top tips for companies attempting to make financial forecasts or calculating cash requirements in these turbulent times.
1. Where to start? Preparing financial projections can be a painful exercise, but it doesn’t have to be. Increasingly sophisticated, off-the-shelf forecasting tools are sufficient for straightforward business models, and these tools can integrate with cloud accounting platforms. For those requiring a custom solution where an offthe-shelf tool is not flexible enough, a bespoke financial model designed and constructed to best practice provides full flexibility in design. A key benefit of this approach is that the user then has a financial model that is truly reflective of the drivers underpinning the financial performance of their business.
2. Establish a review system for your financial model. A proper review requires rigorous appraisal of assumptions and an assessment of the resulting forecasts outputs to ensure that the numbers make sense in the context of the assumptions being made. Should self-review be the only option, take a break – preferably overnight.
3. What does a robust model look like? Human error should be expected. A system of error checks and alerts built into a model will flag up issues such as calculation errors and materially outlying result.
4. Build a scenario handler. A scenario handler linked up to the calculations throughout the model allows the user to review the impact of many scenarios on the forecast financial performance and key performance indicators.
5. Cash is king. Forecasting cash requirements is probably the key concern for any business right now. For those in immediate need and without a detailed financial model already constructed, a simple rolling 13-week income and expenditure spreadsheet can provide a detailed view when updated daily and reconciled to available cash or facility balances. It’s a good starting point for firms responding to our rapidly changing environment. If there’s anything we can forecast with certainty just now, it is continued uncertainty, and the need to be nimble. Businesses with the tools to make informed decisions will be able to adapt, survive, and possibly even thrive in a 2020 nobody predicted. Neil Macdonald is a director of Forecast