Companies of all sizes could benefit from financial modelling that can aid in reducing uncertainties and planning an expansion with more confidence.

Uncertainty is a fact of life for numerous businesses, regardless of where the next customer will be coming from or the amount of the next bill for electricity. But, the uncertainties are a lot more for businesses that are looking to expand. Rapid growth can be as damaging as not expanding at all.

Beware of the risk of business failure.

Small-scale enterprises can easily exceed their limits in the course of expanding. The accumulation of large debts that are no longer addressed could result in a complete shutdown. In many cases, the appeal of a growing economy or an expansion into a new market could cause a company to fail. Utilizing a properly designed financial forecast model to back up a business plan will aid in avoiding these issues.

Financial forecast solution

The financial model reveals how an organisation is likely to perform based on assumptions. It will help assess the credibility of a company’s expansion plans by predicting the expected revenue and expenses. A good financial model will identify fixed expenses to establish the Global Insight April 2018 | 18 minimum breakeven point of revenue. Costs such as wages and leases are often unsustainable when the demand for goods or services is reduced.

Scenario testing

A good business model includes planning what’s likely to occur, as well as other scenarios that could occur. Scenarios will be based on various alternative scenarios to evaluate their impact on the company. They could be based on the creation of new initiatives, increases in rent, and other factors that affect the driving force of demand.

Scenarios can help companies reduce the uncertainties of a plan of action by determining the upper and lower limits of the effects of negative and positive elements. Armed with this information, the company can make decisions with greater confidence, based on the understanding that the actual results align with acceptable standards.

For instance, thorough financial modelling could have stopped several recent business disasters in Australia by placing the businesses in a better position to evaluate the effects of significant increases in leasing costs for new stores and their capacity to generate the necessary revenue to pay these expenses. They could have questioned whether the demand would be adequate in six or 12 months and may have considered the possibility of delaying the opening of a new store for a couple of months.

Financial modelling for all

Financial modelling has historically been accessible to large companies or public utilities, but recent failures in business prove that it is an essential practice that every company should employ. Without a complete understanding of the potential consequences, the risk of having ambitious growth plans is far too serious to ignore.

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