There are several reasons for how financial modeling can help business owners to manage uncertainty.
1. It helps to keep the focus on priorities
It is easy to lose focus during these troubled times. There is negative news from all over the world. We care not only about our businesses but also about our families and their health.
The businesses are so unprotected against the pandemic, and we need to stay calm and analyze the situation. Some business activities will be stopped, and others will be redesigned. The right financial model will help you to identify the crucial activities and focus on them.
2. It shows the stability of the company and its margin of safety
Detailed financial analysis of the company will show the extent to which the company can react to the changes. You can calculate and analyze the main ratios, such as stability, liquidity, profitability, gearing, and others. You can also calculate the break-even point and see the acceptable decrease in revenues to keep the company profitable.
Incidents can affect the company’s ability to pay bills, make payroll, or respond to market changes. Therefore, it is crucial to ensure an excellent level of financial stability.
3. You can analyze the financing sources
It is the right time to assess your financing expenses and consider possible refinancing. The financial model will show you the most expensive high-interest loans and, maybe, a high level of gearing. If it is possible, manage these issues should avoid the crisis.
Maybe you will find loans with a lower interest rate or alternative sources of financing. Refinancing can reduce monthly loan payments and save cash. It is better to test capital options right now.
Additionally, some governments announced that they are starting to provide small and medium businesses, for example, disaster relief loans. Different initiatives and programs should help businesses to manage the financial impact caused by COVID-19.
4. You see the company’s dependence from the main customers and suppliers
Pandemic has caused demand-side shock and supply-side shock for thousands of companies. Together with reduced working capacity, it made it difficult to survive for many businesses. Also, general panic has reduced people’s spending.
The economic assessment of suppliers and customers, including their impact on the company, will be beneficial.
We all know that the dependence of the company from 2–3 main customers or suppliers can adversely affect its stability. It is especially relevant today when people close their businesses and stop buying unnecessary things.
The well-designed financial model will help you to analyze your main contraсtors and the extent to which you depend on them. It will give you some time to find other contractors and make your company less dependent on circumstances.
Also, it is essential to make a preparedness measure and ensure a stable level of inventory and supplies for a specified period. The level of stock will depend on the terms of the storage of your product. This measure will be the guaranty that you can satisfy your customers’ demand even in case of problems with suppliers.
5. You can create several alternative models
It is challenging to plan something under uncertainty. The best financial models can become useless if the situation significantly changes. We advise our clients to make several economic models that take into account all possible outcomes.
For example, you can draft the model with different financing sources and see how it impacts the company’s stability and profitability. Otherwise, you can create several models with varying levels of sales, or with different purchasing prices.
Creating several financial models will help you to anticipate future changes and prepare for them.
Well-designed financial models that were developed by the specialists will bring you many benefits:
– You can share it with your remote team and control the working process. These models will help you to maintain the business process during these difficult times.
– You will see the full picture and can react to the market changes fast.
You can control the situation, or, at least, see what’s going on. Alternative financial models will prepare you for possible changes, and you will see their impact on your business immediately.
If you are a business owner, you need to plan the future under uncertainty. You also need to bring your staff together in terms of quarantine. Well-designed financial models, budgets, and plans will be a solid ground for the work of remote teams. They will also help you to respond to the challenges of the modern world fighting with COVID-19.
We recommend choosing our ready-to-use financial modeling templates to spend less time on drafting the financial summaries and more time on strategic issues, such as the search of new suppliers or entering new markets. We are always ready to support our clients during these turbulent times.