A financial model is an essential aspect of everyday business.
Using a financial model template can ease some of the stress of building one, but building a model in Excel can be a bit complicated. Setting up your formulas and condition stipulations takes time. Worried?
Don't be! We've already created the SaaS financial model you'll actually use. Below, you'll find our top financial model best practices.
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What is a Financial Model?
A financial model is a tool that helps businesses forecast their financial future. Financial models are normally built into spreadsheet software, such as Excel or Google Sheets.
There's a better way to create SaaS financial models.
6 Best Practices for Financial Models
Follow these six best practices when you build your financial models:
1. Plan ahead.
Before you begin work on a financial model, ask yourself these questions:
- What financial issue do you need the model to solve?
- Who will be using the model?
- How will the model be used?
- What are your input, output, and process figures?
- How will you keep all the inputs organized as you build the model?
A successful financial model needs a vision and a goal throughout the model's building process. This also helps when conducting a sensitivity analysis or budgeting for the future.
2. Structure your model's metrics logically.
When you build your model, it must contain these three basic elements:
- Assumptions or inputs. These figures are your bare bones building blocks. For instance, how much revenue do you expect for the period?
- Outputs. What are the resulting figures? If you have X, Y, and Z, what's your projected business footing?
Our SaaS financial model accounts for your metrics in an easy-to-use format.
3. Keep the metrics of your model simple.
Anyone that uses financial models will tell you—they decide if it "works" for them within 30 seconds or less. The simpler the financial model, the more positive feedback it'll receive. Are you using value metrics?
Consider the following dos and don'ts to keep your cash flow statement and financial model simple.
- Limit assumptions to no more than 15
- Keep formula lengths about half the size of the formula bar or less
- Limit the overuse of cell names
- Use different formulas across rows
- Use several different formatting conventions
- Forget to add your executive summary
If using Excel, you'll find several features that help simplify financial models. When you can't create a simple formula, consider breaking it down over several cells. Some other ways of reducing Excel's complexity include:
- The use of flags
- Not nesting IF statements
- Simplifying your IF statements with different functions
- Using logics, such as MIN, AND, or MAX
- Using functions as intended for simplification, such as VLOOKUP or INDEX
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4. Don't use values rather than formulas.
Not everyone understands hard values. While it might save time initially, it ultimately paints you as undisciplined – it threatens the very reliability and transparency of your financial model. It'll appear as though you've neglected some financial analysis. Some of the issues most inherent in using values rather than formulas in your forecasting model include:
- Assumptions aren't obvious, and this can confuse those working with the model.
- Your reasoning isn't as clear.
- People like your CFO, if they're not sure where your data comes from, they may not trust it.
5. Cash flow forecasting estimates and balance sheets must be integrated.
Your balance sheet, cash flow calculations, and other financial statements, like your income statement, are crucial aspects of your model. It might be tempting for time's sake, but you should never omit these documents. Proper financial planning mean these must be part of your overall business model so you can ensure you're accurately representing such things as capital expenditures, value-based pricing, tier pricing, stock turnover, private equity, debt dates, and creditor dates. To instill confidence in your model, end users must have proof of the outcome of your models.
6. Double-check your model for potential errors.
To make sure you've done your due diligence and everything lines up, check your financial model's accuracy. Perform a "sanity" check–if it doesn't make sense on paper, it likely won't make sense in practice!
How Baremetrics Can Help
You've got the SaaS financial model you'll actually use—now you need the data.
That's where Baremetrics comes into play. We even directly integrate with Google Sheets!
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