Financial Modeling Part 5 – Modeling Financial Growth
Transcript
Welcome back. We've been talking about financial modeling the last few videos and there's some confusion about how to model growth in your company.
See, I made this analogy in the first video about a car that looking at the financial statements, the income statement, the balance sheet, the statement of cash flows, that's looking in the past.
What has already happened? It would be like driving a car looking at just the rear view mirror. KPIs, key performance indicators, that would be like driving a car with only the information that's on the dashboard.
what's happening right now imagine trying to drive a car without being able to see forward
in the windshield well that's what running a company without a financial model feels like
you see the financial model gives you a view of the future what's going to happen there
and so many people are confused about how they actually model their company's growth
and they default to putting in something like i'll just grow by 10 every month
You need to understand the hard work that it takes to grow by whatever percentage you want to grow,
10% in this case, right? And the financial model should have assumptions around what levers you're
pulling, what hard work you're doing, and what results you will get as a result. You want to
model how those two interact, and then you want to use the model each month to validate your
assumptions. As you build your model, that hard work can come in the form of lots of different
things. Maybe you're a sales-oriented organization and it's all about how many sales people you have.
Maybe it's about marketing spend and how much money you spend on Google or Facebook or Instagram.
Maybe it's how many conferences you attend and what your sales funnel looks like from there.
Maybe it's how many seminars you run as information to your customer base. It can be anything that you
do that helps you acquire customers if you use the model each month to test these assumptions
you will quickly learn what is working and what is not and it will allow you to put effort behind
the right levers to get the right activity to generate the results you want giving you control
of your business's future it gives you power you learn fast and it makes your business predictable
Compare that to just saying, oh, I'm going to grow 10% every month.
We have been talking a lot about financial modeling, and there seems to be some confusion around how to model the financial growth of your company. Instead of assuming, your company will just grow 10% each month, think about the drives that will cause it to grow and what it will take to get 10% each month. Will you hire more salespeople? Spend more on marketing? Attend more conferences? Run more seminars? Each business has different levers it can pull to acquire more customers. Use your model each month to test your assumptions on these levers. You will then quickly figure out what works and what doesn’t. Once you understand what levers to pull, you can generate the results you want, have control over your business, and make your business predictable. Doesn’t that sound better than praying that you will grow 10%…?
Originally published on the MATH Venture Partners blog.