Why a financial model can help put your best business foot forward

Businesses seeking capital are faced with an obligation to provide financial projections to potential stakeholders. Frequently businesses are not resourced to present financial projections in the form of a bespoke and dynamic financial model as this is a specialised area of finance. However the ability to provide a well-built dynamic financial model can make a company more investable, on the basis that the underling business model is sound.

Typically businesses seeking finance will either a) attempt to build their own model, b) use a template which can be downloaded from the internet and edited to best fit the business, or c) engage an independent advisor to build the financial model for them.

When a business builds its own financial model the business will usually build it from their own internal perspective as opposed to that of the investors. Investors will also be more sceptical of an in-house model as it will lack independent verification which provides significant comfort to investors. When a company builds its own model for investors, finding the correct balance between simplicity, complexity and flexibility can prove very time consuming and difficult to achieve without significant experience in financial modelling.

Taking the second option of downloading a template is a frequently used option as it is viewed, prima facie, as a cost effective and efficient way of generating projections. Although this method may be adequate for very early stages, it soon becomes unfit for purpose as every business has unique elements that cannot be sufficiently captured in and off the shelf model. Ultimately the business will end up having to scrap this to build a bespoke model.

The third option of engaging an independent advisor is the most investor friendly approach and the approach of greatest value to the company. Although the cost may appear to be high at the outset it is by far the most cost effective option as the model should not require significant rebuilding and should be robust, accurate and sufficiently dynamic to provide a good range of projections based on multiple strategies and sensitivities. Typically a model will take between 30 and 100 hours to build, based on the required complexity. Engaging an independent firm with a background in assurance, such as an accounting firm, will provide a high level of comfort both to investors and the business in terms of integrity, accuracy of formulae and quality. 

The question business owners should ask themselves is: “How can I demonstrate to a potential stakeholder, whose business (and mind-set) is different to mine, that my business model works and that their capital will grow the business and generate the returns that meet their investment criteria?”

Moore Stephens offers a best in class bespoke financial modelling service that is competitively priced and provides credibility and integrity to businesses seeking to raise capital. If you would like to discuss this further, please contact Anthony Cunningham on +44 (0)20 7334 9191.
 

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