Financial modelling describes the practice of creating 'models' - essentially charts and graphs - of your finances. This essentially then means creating a visualization of the numbers and finances surrounding your business, and it can be a great way to get more from your company and avoid potential pitfalls. Here we will look at how and why that is and at why you should be using it.
A Crystal Globe
The idea of using financial modelling is primarily to allow you to look into the future. The way this works is simple - by looking at your previous financial history it's possible to identify trends and probabilities in the way your finances will behave in the future. In other words then if your profits have increased by a certain amount each year, or have fallen by a certain amount each year, then financial modelling can allow you to plot this out, but then also look at what it would mean for your business if things continued as they were. If you imagine a line chart then where the horizontal measure was time, then this would mean that you could see what the profits of your business would be like in ten years time if you continued exactly as you were.
This can be very useful when making presentations, or when trying to sell your business or get someone to work with your organization as it can demonstrate to them that your business is on the right track in a way that they will respect. However at the same time what it will mean is that you can plan better for the future - you can decide whether or not to make a particular investment by looking at how long it would take you to pay back the loan, or whether or not you would be able to better afford it if you were to wait a while.
What this can also do for you meanwhile is to allow you to see what might happen if you were to make certain changes. For instance, say your financial model tells you that you are making x amount of profit from your staff right now, then by tweaking a figure such as the number of staff you hire, you can alter that chart to show you how much this would make you - it would take into account the increased salaries you were paying, but at the same time it would show you what the increased income would mean.
As mentioned, being able to show people a graph of your finances can be a great way to get a point across quickly in a presentation. Likewise though this can also be useful for a range of reports, and to help you keep track of things yourself. Whether it's your annual report for the share holders, or just something you can look at to keep track of your finances, having something visual is a good way to stay on top of your finances and to quickly see the bigger picture.
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Aaron Barber works at Bbeyond Charts, for more information about their products and services click here
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