A financial model is a critical tool for helping you make business decisions.
In this blog post, I am going to define how to build a simple financial model for your small business and why doing so can help you improve performance and make better decisions.
What Is A Small Business Financial Model?
A financial model is your business in black in white. It is the financial skeleton of your business.
According to Wikipedia - "Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a business..."
A good financial model does the following:
- Details the products you plan to sell and the revenue generated from those products.
- Details your cost of goods sold or the costs incurred when you sell those products.
- Details who you think you will need to hire, what they will do and what you will pay them.
- Details how much you will spend on sales and marketing.
- Details how much you will spend on general and administrative costs.
- Details if your business will make a profit in any given month.
Let's go through elements 1-3 in this blog post and why they are important to your business.