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Importance of Financial Models in Business Decisions

Apohan Corporate Consultants Pvt. Ltd. > Financial Strategy > Importance of Financial Models in Business Decisions

Apohan has excellent province progress in the preparation of financial models. It can help a business in analysing all the financial implications of a strategic decision for a new growth project.

Risk of applying thumb rules for critical high-value financial decisions

Businesses involve a lot of financial transactions, a very big portfolio of products of complex nature, a lot of permutations and combinations of business models, a lot of other options and parameters regarding operational and financial aspects over a very large number of years.

The back of the envelope calculations ignores the impacts of many very critical and sensitive issues. Also, modern-day businesses have not remained simple. Hence, an elaborate MS Excel-based model is prepared. In many of the enterprises, it has been observed that very large scale of decisions is taken by the rule of thumb. The business environment is so dynamic and every business or project is so different from another that the degree of error in the Thumb Rule and the margin of profit in the decisions are almost comparable.

Many new growth initiatives of companies may go wrong only because the detailed financial analysis was not done in an MS Excel-based model and some movement in some parameters spoiled the show.


Financial models, Apohan works on:

  • New business corporate finance model
  • New business project finance model
  • Budget model
  • Cost analysis model
  • An existing business financial model
  • Working capital model
  • Financing plan model
  • Investment financial model
  • Procurement financial model
  • Business Capex model
  • Business OPEX model
  • Project Capex model
  • Project OPEX model
  • EPC cost model
  • PPP financial model
  • Project finance model
  • Bid model
  • JV financial model
  • Operations financial model
  • Annual financial Model
  • Valuation model
  • Data Models

Important attributes of financial models

 

User-friendly financial models

Apohan prepares the financial model in a database format. It helps to make changes in certain assumptions and to incorporate radical strategic decision changes immediately. Clients are able to easily make at least the basic changes without having to depend upon the consultants and without having to arrange one more meeting after a few days.

The model incorporates sensitivity analysis for various factors that impact the financial performance, financial viability or valuation. The client is able to run various scenarios and prepare data tables. The important correlations are represented in the graphs.

The users of the model, that is, the clients, are the final owners of the model.

So don’t worry we will deliver a working excel file model.

 

Inputs for financial models

Preparation of the financial model is not a standalone job at the consultant’s office. It is carried out with good interaction and a coordinator should be appointed from the Finance Department of the client to provide various inputs and guidelines. Various strategic decisions such as business model, capital structure etcetera should be provided by the top management of the company. Other inputs such as employee costs, Revenue related assumptions, Various cost-related data are to be provided by the respective departments

Composition of a financial model

The financial model has a few independent threads. One of them is the project cost. Along with the impact of inflation for the commissioning of the project and the interest during this period, the total project cost is calculated. Based on this overall requirement and requirement of the working capital other than from the internal accruals, the capital requirement is calculated.

Revenues are projected based on the market survey and the marketing strategy including the pricing strategy and capacity utilisation plan. Gives an idea of the projected revenues.

The operating costs are calculated based on the configuration of the manufacturing facility, the human resources required, the raw material required, the marketing costs, manufacturing overheads, corporate overheads, etc.

The components of the total project cost help in the preparation of the depreciation schedule for accounting purposes and tax purposes.

The debt component in the capital structure provides a way to calculate the future interest payments and repayment of the principal amount.

With the help of all these inputs, the financial statements in terms of profit and loss statement, balance sheet and cash flow statements are prepared. After checking for errors and fine-tuning, this financial model will provide the desired answer.

The degree of detailing would depend upon the size of the transaction and the worth of the transaction for the organisation.

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