Financial modelling and analysis
We develop bespoke financial models to assist with business case evaluation, scenario and sensitivity analysis, and general investment considerations.
Although all models are customised to optimally meet every client’s individual needs, the main sections a client would expect to see are:
- Assumptions and drivers: It’s crucial to determine which inputs will drive the forecast and how. We will work with you to agree the drivers before we start building the model.
- The methodology and analysis engine: This section converts drivers into desired outputs via a range of algorithms and functions. To ensure model stability and accuracy this section is typically protected from change.
- Outputs: This will change to fit the client’s need, however a standard delivery is a projected profit/loss statement, balance sheet, and cash flow. Charts and dashboards can also be created to provide additional information. We can also provide discounted-cash-flow analysis, such as net present value, internal rate of rate, return on investment, etc. This is particularly relevant when assessing business valuations.
- Sensitivity analysis: A more advanced step, this shows clients how stable the projections are to movements in business drivers. For example, the client may request three different projected income reports based on best/likely/worst case sales growth. Note that sensitivity analysis can become very complex when many business drivers are involved.
It must be emphasised that financial models are not and cannot be a seen as a representation of certainty, nor a guarantee of profit or success. They are a powerful tool for assessing potential performance, but their accuracy is dependent on how well the user predicts business drivers.
An example of a typical project:
Mr Smith runs a successful manufacturing business from a rented warehouse. He purchases raw materials from a local supplier and uses equipment to produce finished items for sale. He wants to expand his operation in 3 ways:
- Rather than renting his premises, he wants to purchase a larger facility via bank finance.
- He wants to invest in faster, more efficient machinery to reduce production time and cost.
- He wants to reduce his marginal input costs by purchasing larger quantities of raw materials in bulk from overseas.
These three initiatives can be implemented on their own or in combination. To determine viability, Mr Smith would use a financial model to forecast the potential benefits and risks. The financial model would consider:
- The business-as-usual position: all known business drivers would be projected over the foreseeable future to determine how Mr Smith’s business would likely perform if none of the initiatives were pursued.
- Each of the initiatives would be modelled in isolation in accordance with the 4 steps above, and compared to the above business-as-usual projection to estimate each initiatives’ ‘incremental’ performance. Sensitivity analysis would be employed to highlight areas of risk and opportunity.
- The process would then be repeated under the assumption that multiple initiatives are implemented simultaneously.