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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โข Overly Optimistic Projections: Avoid unrealistic assumptions (usually in customer acquisition and revenue, sometimes forgetting expenses). Use historical data and market research.
โข Ignoring Key Metrics: Ensure youโre 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.)
โข Lack of Regular Updates: Financial models can quickly become outdated.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.)
โข Complexity Overload: Donโt 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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โข Regular Reviews: Schedule regular check-ins to update assumptions and actuals, usually quarterly.
โข 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 whatโs necessary.
โข Utilize Software Tools: Leverage financial modeling software for accuracy and efficiency. (Have I mentioned Finmark? Xero? and more - ๐ก๐๐ฉ'๐จ ๐ฉ๐๐ก๐ !)
โข 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 isnโt 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 weekโs posts helpful, share them with a founder who might benefit. Letโs spread the knowledge and help more businesses succeed!