Financial Modeling is a tool used to predict future financial performance based on past performance and current trends. The goal of Financial Modeling is to use the information available to make informed decisions about financial matters, such as budgeting, forecasting revenue, and evaluating investment opportunities.
Imagine that you are a restaurateur considering opening a second location. How useful would it be to have an estimate of how that location would perform?
That’s where Financial Modeling comes in.
You can run simple financial models based on your original location to estimate the revenue and expenses for the first year of your new location.
Or you can run more complex models that take location, target demographic, and competition for your new location into account. Perhaps your second location is in a wealthier area, or in a neighborhood that’s more walkable; a financial model can help you understand how those things might increase your revenue, if at all. Perhaps this location is near several other successful restaurants that serve similar cuisine; a model can help you see whether it’s worth opening in that area at all.
Financial Modeling, when done correctly, can act as a type of crystal ball that helps you make data-backed decisions for your business.