A good financial model should feed into three main pages, which happen to match the three main financial statements of a business – profit & loss, balance sheet, and stateme
A good financial model should feed into three main pages, which happen to match the three main financial statements of a business – profit & loss, balance sheet, and statement of cash flow. These three components of the model should never be circumvented nor should we ever try to short-cut the need for all three.
With these three pro forma statements as the final deliverable, there are at least three additional worksheets that need to be part of the model. They include assumptions,
ASSUMPTIONS
Every working financial model should have one page that contains a majority of the assumptions for the model. Assuming we are using
MARKETING/SALES/COGS
We need detail! It is not sufficient to say we are going to grow sales by 50%. What are the marketing activities that will drive that growth? How many leads will we need to generate a sale? What is the cost of these leads and other marketing activities? Which product or service lines will grow more than others? How does our gross margin differ on these lines as compared to slower-growth or even obsolete lines? Is there a difference in both the collections and the payment for costs of goods sold between these lines? How will this impact cash flow? These are the questions we look to this worksheet to answer.
PAYROLL
How many people is it really going to take to accomplish what out financial model projects? What are the salary and wage costs to hire all of these people? Are our hiring practices in line with the sales per employee ratio according to our industry benchmark? Have we correctly factored in all payroll burden and benefit costs, including FICA, FUTA, SUTA, worker’s comp, other state payroll taxes, health insurance, 401(k) match, etc.? Have we correctly forecast all of the costs associated with adding these new employees, including recruiting,
While there are many other supplemental worksheets that may be used to help build a formidable working financial model, these three are a requirement. We either need to create and maintain this model ourselves, or we need to look to finance and strategic planning professionals like those who fill the CFO job for either one company or for many companies in the capacity of part-time CFO.