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Developing a financial plan (i.e. financial model) is an essential step in the process of creating a comprehensive business plan, setting goals and evaluating the performance against those set goals. A financial model is a tool used to forecast future financial performance based on historical data and assumptions about the business.
\n\n\n\nLet’s face it, developing a comprehensive financial plan for a company is no easy feat. There are numerous factors that must be taken into account, such as:
\n\n\n\nDeveloping a comprehensive financial plan that accounts for all of these factors can be incredibly time-consuming and requires a significant skill and investment of resources.
\n\n\n\nTo tackle this challenge, many companies turn to specialized strategy or financial consultants, if they can afford their services. These consultants are typically from Big 4 firms or similar, and are specially trained to develop complex spreadsheet models and perform financial analysis. They bring a wealth of knowledge and expertise to the planning process, helping companies develop a plan that is comprehensive, logical, flexible, and accurate.
\n\n\n\nHowever, the expertise and services of these consultants come at a steep cost. A single financial plan exercise can quickly cost $50,000 or more, making it a significant investment for any company. Despite the high cost, many companies are willing to make this investment, recognizing the importance of having a high-quality financial plan. A well-crafted financial plan can help companies achieve their financial goals, set clear targets for their employees, measure performance, identify new opportunities for growth, and stay ahead of the competition.
\n\n\n\nAnd after the consultants complete the financial model, changing it at a later stage becomes impossible for the company. The financial model was built in excel, by experts in financial modeling, so they made it quite complex.
\n\n\n\nModeliks is here to change this narrative, and give YOU and everyone else with a small or medium sized business, or a startup, the ability to develop such a plan yourself, without being a spreadsheet expert and without depending on consultants.
\n\n\n\nLet’s now get started with understanding the financial planning process. We will cover the following topics:
\n\n\n\nBy the end of this article, you will have a solid understanding of the steps involved in developing a financial model and how to use it to make informed business decisions.
\n\n\n\nThe first step in developing a financial model is to identify the purpose of the model. What are you trying to achieve with the model? Are you looking to forecast future revenue and expenses? Are you trying to determine the viability of a new business idea? Do you want to set up targets for your employees? Are you planning to share it with potential investors? Will you use it to request a loan from a bank?
\n\n\n\nOnce you have identified the purpose, you can then determine the structure of the financial model, the level of detail and complexity required. For example, a financial model used to evaluate the potential return on investment for a specific project may require more detail and complexity than a financial model used to request a loan from a bank.
\n\n\n\nThe next step is to define the structure of the financial model. This involves determining the level of detail you will want to have in your model, including:
\n\n\n\nIt is important to consider what financial outputs are relevant to your business and to include them in the model. However, you should also be careful not to include too many metrics, as this can make the model unnecessarily complex and difficult to use.
\n\n\n\nOnce you have identified the purpose and structure of the financial model, the next step is to gather relevant data. Gathering data at this stage helps with knowing what data is available so that you can build your financial model based on that data. This includes historical financial data, as well as any other data that may be relevant to the model.
\n\n\n\nExamples of historical financial data include income statements, balance sheets, and cash flow statements. Other data that may be relevant to the model includes market research, industry trends, customer data and operational metrics.
\n\n\n\nIt is important to ensure that the data you gather is accurate and reliable. This will ensure that the financial plan is as accurate as possible.
\n\n\n\nThe next step is to define the assumptions, or the drivers of your financial model. Assumptions are the inputs into your financial model that “drive” the future financial results. This is why assumptions are also called drivers. Examples of business drivers include sales growth rates, gross margin, number of employees, operating expenses, etc..
\n\n\n\nAssumptions are the most important part of the financial model because they drive all the calculations and have the highest influence on the planned financial results. However, it is important to ensure that the assumptions are realistic and based on relevant data.
\n\n\n\nThe next step is to build the financial model. You would now create all the formulas for calculating each line in your financial statements. All revenues, costs, assets, liabilities and cash flows will be linked with formulas to the assumptions, or drivers, that you defined earlier as inputs into the model.
\n\n\n\nUntil now, this involved creating a spreadsheet that links all of the financial outputs of the model with the drivers (inputs) you have created. In order to build your model in a way that accurately reflects the realities of your business and its interdependencies, you will need to build in a significant degree of linkages and formulaic dependencies into your model.
\n\n\n\nModeliks now allows exactly that, for you to build your financial plan based on the specific value drivers of your business, without the need of building your financial model in a spreadsheet and creating thousands of formulas.
\n\n\n\nLet’s understand what a driver-based financial model is and why it matters.
\n\n\n\nDriver-based financial planning is a process of identifying the key activities (also known as ‘drivers’) that have the highest impact on your business results, and then, building your financial plans based on those activities. When you can measure and influence these activities, you can successfully manage and grow your business.
\n\n\n\nDriver-based planning is important because it allows you to establish relationships between the financial results and the resources that you need to achieve those results (like people, marketing budgets, equipment, etc.). By connecting your financial plans to the resources required for each activity, you can allocate the right resources to achieve your goals.
\n\n\n\nExplaining this better, let me take you through an example. Let’s say that you have a SaaS software business, like Modeliks, with a target to achieve 1 million revenue next year.
\n\n\n\nThe key drivers for reaching this revenue target could be the number of clients you need, multiplied by the average price a client pays for your software. But then, the number of clients depends on two different drivers, which are, the number of leads you need to generate, and the conversion rate from a lead into a customer. Now, the number of leads will determine how many sales employees you need.
\n\n\n\nThe number of leads will also determine the marketing budget that you need to attract those leads. And, the number of clients will determine how many customer support people you need. You get the point. The 1 million revenue target drives a whole set of operational activities and required resources. A driver based financial plan allows you to logically connect all the operational activities and resources to the financial targets. And if you change your revenue target, all other resource budgets will automatically and logically change.
\n\n\n\nFinally, driver-based planning helps you set operational targets to your employees that they can control and feel accountable for. It also allows you to review your business performance along those drivers and know exactly which operational processes work well, and where you need to improve.
\n\n\n\nWhen building the model, it was always important to ensure that all of the formulas and calculations are accurate. You should also include clear instructions and labels to make the model easy to use.
\n\n\n\nOnce you have built the financial model, the next step is to validate it. This involves comparing the projections made by the model to actual financial performance.
\n\n\n\nOne way to validate the model is to compare the projections to historical financial data. This will help you determine how accurate the model is and identify any areas where the projections may be too optimistic or too conservative.
\n\n\n\nIt is also important to validate the model by testing different scenarios. This involves changing some of the assumptions and seeing how this impacts the financial projections.
\n\n\n\nValidating the model is an important step as it helps ensure that the projections made by the model are as accurate as possible. Before Modeliks, validating your model will likely have brought out many different coding issues in your spreadsheet model, which in turn take many hours or even days to fix. Today, with Modeliks, you can focus on what is really important – your business – and leave the technical formulae and background calculations, summary tabulations and balance sheet and cash flow calculations to the Modeliks tool to take care of.
\n\n\n\nYour validation work will move from fixing linking errors towards running different business scenarios.
\n\n\n\nThis is the next level and the future of financial model validation, and will enable you to make informed decisions about the business today and in the future.
\n\n\n\nOnce you have validated the model, the next step is to perform a sensitivity analysis. A sensitivity analysis involves testing how changes in one or more assumptions will impact the financial projections.
\n\n\n\nWithin Modeliks, you can run scenarios at the click of a button, whether you want to simulate increases or decreases in revenue due to changes in conversion or penetration rates, or by running profitability scenarios with varying marketing mixes and customer acquisition costs. All within Modeliks’ easy-to use interface, and presented to you with pre-defined charts that should cover 99% of your needs, while also giving you the flexibility to define your own output metrics and dashboards.
\n\n\n\nPerforming a sensitivity analysis is important as it helps identify the areas where the business is most vulnerable to changes in assumptions. This will enable you to develop strategies to mitigate any risks and ensure the financial health of the business.
\n\n\n\nDeveloping a financial plan is an important step in the business planning process, setting targets, and evaluating the financial performance of a company.
\n\n\n\nUp until recently, most financial plans were done in a spreadsheet. Developing a financial model in a spreadsheet is standard practice because most people are used to using spreadsheets. Also, there were no financial planning tools available (or affordable) to small and medium size companies.
\n\n\n\nDeveloping a high quality financial plan in a spreadsheet is actually a difficult and time consuming task:
\n\n\n\nThe alternative to spreadsheets are financial and business planning tools like Modeliks. Modeliks solves the issues that come with using spreadsheets, while providing step by step guidance on creating a professional, accurate and thought through financial plan.
\n\n\n\nIt is important to ensure that the financial plan is logical, driver-based and, as accurate as possible, because too many business decisions will be made based on that plan. You will set targets for all your employees and track your performance based on the plan. You will make investment decisions. You might even request funding based on it. There is too much at stake when creating a financial plan. Make sure you do it right.
\n\n\n\nToday we released a massive new update of Modeliks. A multidimensional Modeliks 2.0. I am both happy and sad to see Modeliks grow up. I liked baby Modeliks. He was cute and a little clumsy. Now, we created a beast.
\n\n\n\nWe listened to your feedback and made Modeliks by far the best financial planning and reporting tool for SMEs. Alright, I might be a bit subjective, but here is what’s new:
\n\n\n\nAnd there is a lot more to come in the next few months. Stay tuned for new features, and in the mean-time, plan, manage and grow your business with Modeliks 2.0.
\n\n\n\nLet’s recap. Now you can:
\n\n\n\nEnjoy Modeliks 2.0! We know we are!
\n\n\n\nAuthor:
Modeliks Team
A variance report is a financial document that compares actual performance against planned or budgeted figures. It highlights differences (variances) between expected and actual results, helping businesses identify areas where they are overperforming or underperforming. These reports are commonly used in financial management, project management, and operational planning.
\n\n\n\nVariances in a report can be classified into:
\n\n\n\nA variance report is a crucial tool for analyzing financial performance, improving budgeting accuracy, and making strategic decisions.
\n\n\n\nVariance reports allow businesses to track deviations from their budget, helping them stay on top of their financial plans and prevent overspending.
\n\n\n\nBy analyzing variances, businesses can make informed adjustments to their financial strategies, resource allocations, and operational processes.
\n\n\n\nSignificant variances can signal inefficiencies in production, procurement, or sales, prompting businesses to investigate and optimize their operations.
\n\n\n\nHistorical variance reports help businesses refine their financial projections and make more accurate forecasts.
\n\n\n\nBusinesses can identify cost overruns and take corrective action to control expenses and enhance profitability.
\n\n\n\nBy comparing actual results to expected outcomes, variance reports hold departments and individuals accountable for their financial and operational performance.
\n\n\n\nUnderstanding financial and operational variances allows businesses to identify potential risks and implement preventive measures before they escalate.
\n\n\n\nA variance report provides a clear picture of a company’s financial health by comparing budgeted vs. actual results.
\n\n\n\nIt highlights unexpected expenses and cost overruns, allowing businesses to take corrective measures.
\n\n\n\nBy tracking sales variances, businesses can determine if revenue is growing as expected or if adjustments are needed.
\n\n\n\nVariance reports provide valuable data for future business planning and strategy adjustments.
\n\n\n\nDepartments and employees can be held accountable for meeting financial and operational targets.
\n\n\n\nReal-time variance analysis helps managers make quick, data-driven decisions to optimize performance.
\n\n\n\nUnforeseen variances can indicate changes in market trends, economic conditions, or customer behavior, allowing businesses to adapt accordingly.
\n\n\n\nVariance reports are essential tools for financial analysis, cost control, and strategic decision-making. By regularly monitoring variances, businesses can improve their financial accuracy, enhance operational efficiency, and ensure sustainable growth. Whether used for budgeting, forecasting, or performance evaluation, variance reports help businesses stay competitive and financially stable.
\n\n\n\nMake confident decisions with Modeliks. Plan, manage, fundraise and grow your business.
\n\n\n\nAuthor:
Modeliks Team
Financial accounting and management accounting are two essential branches of accounting that serve different purposes but are equally critical for business success.
\n\n\n\nFinancial accounting focuses on recording, summarizing, and reporting a company’s financial transactions over a specific period. It follows standardized accounting principles such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). The key objective of financial accounting is to provide external stakeholders, including investors, creditors, and regulators, with an accurate financial picture of the company through financial statements such as the income statement, balance sheet, and cash flow statement.
\n\n\n\nManagement accounting, on the other hand, is designed to assist internal stakeholders—such as executives, managers, and department heads—in making informed business decisions. Unlike financial accounting, it is not regulated by external standards and focuses on providing customized reports, budgets, forecasts, and financial analysis to optimize operational efficiency and strategic planning.
\n\n\n\nFinancial accounting ensures businesses adhere to regulatory and tax compliance requirements by preparing standardized financial reports. This transparency builds trust with investors, banks, and government agencies.
\n\n\n\nManagement accounting provides real-time financial insights and performance metrics that help businesses make data-driven decisions for growth and profitability.
\n\n\n\nAccurate financial accounting reports are essential for attracting investors and securing loans, as they provide a clear picture of a company’s financial health and risk profile.
\n\n\n\nManagement accounting plays a crucial role in setting budgets, monitoring expenses, and optimizing resource allocation, ensuring the business remains financially stable.
\n\n\n\nBoth financial and management accounting contribute to assessing business performance. While financial accounting evaluates overall profitability, management accounting focuses on department-wise and process-specific efficiency.
\n\n\n\nProper financial and management accounting practices identify potential financial risks and inefficiencies, helping businesses take corrective action before they become critical issues.
\n\n\n\nWith accurate financial records and strategic insights, businesses can plan for expansion, manage cash flow effectively, and ensure long-term sustainability.
\n\n\n\nFinancial accounting ensures businesses generate comprehensive financial reports, including income statements, balance sheets, and cash flow statements, which are crucial for external reporting and compliance.
\n\n\n\nBusinesses can avoid legal and financial penalties by maintaining proper records and ensuring compliance with tax laws through financial accounting practices.
\n\n\n\nManagement accounting enables businesses to create financial projections, set budgets, and track performance to ensure alignment with long-term goals.
\n\n\n\nBy analyzing product costs, revenue streams, and operational expenses, management accounting helps businesses maximize profitability.
\n\n\n\nUnderstanding cash inflows and outflows through financial and management accounting ensures businesses maintain liquidity and avoid financial distress.
\n\n\n\nManagers rely on financial insights from management accounting to make strategic decisions, such as pricing strategies, cost reduction plans, and investment opportunities.
\n\n\n\nManagement accounting identifies inefficiencies and suggests improvements in processes, helping businesses operate more effectively and reduce waste.
\n\n\n\nAnd right-after Q1 2025 QuickBooks Accounting Integrations is coming to Modeliks. Stay tuned.
\n\n\n\nFinancial accounting and management accounting play vital roles in the success of a business. While financial accounting ensures compliance, transparency, and trustworthiness, management accounting provides valuable insights for internal decision-making, budgeting, and operational improvements. Together, they enable businesses to maintain financial health, achieve growth, and sustain long-term success.
\n\n\n\nMake confident decisions with Modeliks. Plan, manage, fundraise and grow your business.
\n\n\n\nAuthor:
Modeliks Team