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.
You want to avoid making any financial decisions in your business arbitrarily.
When you decide to increase prices, make an investment, or cut an expense, there should be some data you can point to that justifies your decision. Otherwise, you might find yourself pricing your business out of your area, investing in opportunities with little return, or cutting expenses prematurely.
Financial Modeling helps you make the right call with information you can trust.
The added benefit of Financial Modeling, especially when done with an expert, is that you can explore these options in a type of “sandbox”. You can estimate how things like price changes or investments will impact your bottom line without trial-and-error.
If you want to see how a 10% price increase will impact your sales, you can model that data before changing anything in front of your customers.
At ANC, we use specialized modeling tools that allow us to explore different financial factors with our clients so they can see how their numbers change without ever lifting a finger.
At Anne Napolitano Consulting, our Financial Modeling process will vary depending on your business’s unique needs. We’re flexible, and can help you with one-off modeling (e.g, in the event of opening a new location or exploring other investment opportunities), or we can implement quarterly review and modeling routines. In any case, we will be using specialized modeling software to explore the future of your business and to help you make data-backed decisions.