I was recently speaking with an entrepreneur friend of mine who had worked tirelessly for the past six months preparing a financial model for his budding business empire. His management team had put in hundreds, if not thousands of man hours, doing their due diligence and analyzing every possible scenario (several times). Having taken a 360 degree view of their venture, they felt with near certainty that the model they had put down on paper would become reality.
Will it? I believe strongly in my friend and his team and for that reason I have no doubt they will succeed. Will the business play out in the same way as projected in the financial model? Probably not.
No matter how much research, analysis, and elbow grease we put into our financial projections, they are always wrong. Usually not by 100%, but still wrong nonetheless.
A financial model is simply a guess as to what we believe is going to happen in the future. All we can do as business planners is make a reasonable and educated guess based upon what we know today about our business, our products/services, our market, our competitors, our technology, etc. When we wake up tomorrow morning there is an excellent chance that something we thought we knew about our business or opportunity is now different (even if it is only minor).
For that reason, it is always advisable to build a financial model that has just enough detail to make you comfortable with the financial side of your business, but not too much detail that the model becomes useless after it is “done”.
The result of my friend’s effort was a behemoth financial model that spanned six Excel files and more than 100 tabs of information. Even for those who had spent the most time preparing the model it was nearly impossible to follow the logic between so many tabs, and even worse following data between Excel files.
In certain circumstances, financial models like this are of great value in helping a company understand what factors will increase their odds for long-term success. These types of models can also ensure a management team focuses its scarce resources only on those activities of most importance.
While this level of granularity will effectively enable my friend to determine the overall potential of his vast network of businesses, the model will be of limited use on a go forward basis. As factors change – which they always do – it will be too complex to ensure the financial model accurately reflects current reality on a regular basis.
I always suggest the keep it simple stupid method to the entrepreneurs I know. If you’re financial model starts to confuse even you (or the person developing it for you) then simply stop. The last thing you want to do is continue down a path that results in a financial projection that is cumbersome and unusable long-term.
Whether you decide to create your own financial model or you build yours using a business plan software solution such as Jian’s Biz Plan Builder or Jian Biz Plan Builder Online, the key is to keep it simple. Include just enough detail to make you feel comfortable and allow you to answer investors questions, but not so much detail that managing your model becomes your full-time job.
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