Building Financial Models

Sooner or later, a prospective investor is going to pose this question and a ready affirmative answer should be in the offing. But – why is a financial model important to an investor, and more importantly, to the entrepreneur?

The financial model is an expression of the company’s business plan, but in dollars and cents. In many ways it is about financial planning, even if the company does not have historical operating figures to work from, and even if it can merely project what might be a logical expression of revenues, costs, and resources consumed over the next number of years.

Many entrepreneurs get panic attacks at the very thought of producing balance sheets and income and cash flow statements, and they are content to hide behind the coat tails of their accountants. Although an accountant is a necessary advisor, the entrepreneur ultimately has to have a solid knowledge of the key financial drivers and assumptions of the business.