Founders and leaders of high-growth companies are familiar with the power that financial modeling offers. By experimenting with different inputs, the impact of various decisions can be assessed. This makes financial modeling a strategic tool when used correctly, offering a high-level, dynamic view of the company’s future.
An underutilized aspect of financial modeling, however, is using this potent process to energize and motivate teams. In giving teams the visibility and context that financial modeling provides, you can empower them and show how their role fits into the company’s vision.
Here, we’ll take a deeper look at leveraging financial modeling in this way, including tips and best practices to get the most out of the process.
Financial modeling is the process of creating a mathematical representation of a financial situation. In the past, this was often done using a spreadsheet. Today, modern companies use solutions like Decipad to unlock the full potential of financial modeling.
The model is used to forecast a company's future financial performance based on historical data and assumptions about future conditions.
Key aspects of financial modeling include:
Financial modeling is helpful in that it allows stakeholders to understand the impact that different inputs have on a company’s financial future.
There are several important benefits of financial modeling. In general, these include more informed decision-making, more accurate forecasting and planning, and better risk management.
But what about financial modeling as a key communication tool? Here’s where the formidable capabilities of the process really come into their own.
You can leverage financial modeling to:
Here is a robust 7-Step process to energize and motivate teams using financial modeling:
Clearly articulate the company's financial vision and how it aligns with broader business objectives. Explain how the financial model supports this vision and the role each team member plays in achieving it. This helps create a shared sense of purpose and direction from the beginning.
Provide context for the financial model by explaining the underlying assumptions, data sources, and methodologies used. Ensure the team understands the rationale behind the projections and how various factors influence the outcomes. This builds trust in the model and its relevance to the team's work.
Involve team members in the financial modeling process by seeking their input and feedback. Encourage them to share insights and suggestions for improving the model. This collaborative approach enhances the model's accuracy while engendering a sense of ownership and commitment.
Encourage the team to experiment with different scenarios by adjusting key inputs in the financial model. This exercise helps them understand the impact of various factors on the company's financial performance and empowers them to identify areas for improvement and innovation.
Use the financial model to identify and highlight potential growth opportunities. Present these opportunities to the team, explaining how they can be leveraged to achieve better financial outcomes.
Establish clear goals and ambitious stretch goals that challenge the team to exceed expectations. Communicate these goals within the context of the financial model, emphasizing the benefits – and realistic chances – of achieving them. The financial model can also help show what inputs are needed to achieve the desired output, i.e. working “backwards” from the end goal to what is needed today.
Break down the journey towards achieving the financial goals into smaller, manageable milestones. Use the financial model to track progress against these milestones and celebrate achievements along the way. Regularly reviewing and acknowledging progress keeps the team motivated and focused on the end goal.
Following these steps will lead to “Aha!” moments for your teams, intensified motivation, and increased buy-in to the company vision.
A SaaS founder can now gather the company together in an all-hands meeting and use Decipad to present dynamic financial modeling. By showing what’s possible, and the impact the seemingly small changes can have, the founder can motivate the whole company and get the room buzzing.
For example, using an existing Decipad template – in this case a SaaS Profit & Loss Forecast would be perfect – the founder can show that by increasing the MRR growth rate from 4% to just 6%, annual revenue will jump by almost 20%.
Or that decreasing the monthly rent currently being paid for the offices can improve the net margin by a massive two percentage points – and opening up the discussion of a fully remote environment.
Each team, team leader, and team member can be given the context needed to make their contribution more meaningful. The net result? More engagement, more motivation, and better results from the micro to the macro level.
Get started with Decipad today – choose from pre-made templates, or create your own. Happy modeling!
1. What is the primary purpose of financial modeling?
The primary purpose of financial modeling is to create a detailed and dynamic representation of a company's financial situation to forecast future performance, evaluate potential scenarios, support decision-making, guide strategic planning, and give context to stakeholders. It helps businesses understand their financial position, project future financial outcomes, and make informed financial and operational decisions.
2. What are the key components of a financial model?
The key components of a financial model typically include input assumptions (such as revenue growth rates, cost structures, and capital expenditures), detailed financial statements (income statement, balance sheet, and cash flow statement), calculations and projections (profitability, cash flow, financial ratios), and scenario analysis capabilities. These elements work together to provide a comprehensive view of a company's financial health and future potential.
3. How often should a financial model be updated?
A financial model should be updated regularly to ensure its accuracy and relevance. The frequency of updates depends on the business's needs and the pace of change in its operating environment. Typically, models are updated quarterly or annually, but more frequent updates may be necessary in dynamic industries or during periods of significant change or uncertainty. Regular updates help maintain the model's effectiveness as a decision-making tool.
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