Common Pitfalls and Best Practices in Financial Modeling - Tips for Maintaining an Accurate and Useful Financial Model (5 of 5)

5 of 5: Common Pitfalls and Best Practices in Financial Modeling - Tips for Maintaining an Accurate and Useful Financial Model

This week, we've explored what financial modeling is (Monday), elements a model should include (Tuesday), building out a model (Wednesday), and how to use models for fundraising and forecasting (Thursday). To read them, go to my profile and scroll down on posts.

Now, for Friday - let's talk about common pitfalls to avoid and best practices for maintaining an accurate and useful financial model.

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โ€ข Overly Optimistic Projections: Avoid unrealistic assumptions (usually in customer acquisition and revenue, sometimes forgetting expenses). Use historical data and market research.
โ€ข Ignoring Key Metrics: Ensure youโ€™re not missing crucial financial metrics. Each industry has common metrics; use the ones for yours. (Finmark by BILL helps in this area, another reason why I love it for clients.)
โ€ข Lack of Regular Updates: Financial models can quickly become outdated. Schedule regular updates to keep your model current. I suggest quarterly updates to align with actuals and update the model - might take a week or two. (Finmark also removes the friction for this.)
โ€ข Complexity Overload: Donโ€™t make your model too complicated to use. Keep it simple and focused on key data points. (Again, Finmark saves the day by keeping you in line with standard business metrics.)

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โ€ข Regular Reviews: Schedule regular check-ins to update assumptions and actuals, usually quarterly.
โ€ข Scenario Planning: Develop multiple scenarios to prepare for different business conditions. Focus on business model types and revenue projections, but don't go overboard wasting too much time on this - use your judgment on whatโ€™s necessary.
โ€ข Utilize Software Tools: Leverage financial modeling software for accuracy and efficiency. (Have I mentioned Finmark? Xero? and more - ๐™ก๐™š๐™ฉ'๐™จ ๐™ฉ๐™–๐™ก๐™ !)
โ€ข Involve Key Stakeholders: Collaborate with team members to ensure comprehensive and realistic modeling. This includes your board and executive team - keep them in the loop and be open to their observations and feedback.

While making a financial model is crucial to raise funds, it isnโ€™t a one-time task. By creating this as your business roadmap and referencing it regularly, it becomes useful for informed decision-making and strategic planning.

Verte Consulting offers one-off CFO services to help clients prepare and hone their financial model. Whether you are raising funds or an established scale-up, we utilize Finmark with other business software to get your financials quickly and accurately.

Stay engaged and keep learning! If you found this weekโ€™s posts helpful, share them with a founder who might benefit. Letโ€™s spread the knowledge and help more businesses succeed!

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Key Metrics for Agencies and Professional Services

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Using Financial Models for Decision Making - How to Leverage Your Model for Strategic Planning and Fundraising (4 of 5)