Realising the value of a well-planned and built financial model

04 September 2020

By Anthony Cunningham.

All businesses will at some point require a financial model to monitor and forecast performance for all stakeholders and potential providers of capital. Financial modelling is both an art and a science, and as such when approaching a model build exercise it is essential to take time to plan exactly what the model is going to be used for.  Although there have been several attempts at standardising financial modelling, none have ever really taken hold and this is seen in the varying quality of models used across the market. Financial modelling has evolved almost exponentially over the last 5-10 years and it is now almost mandatory for a company to provide a financial model for any capital raise, be it debt or equity, and to keep this maintained throughout the period that the capital is in in place.

In times of COVID-19 it has arguably never been more important for businesses to be able to monitor, assess and adjust their business economics to help them react to a sudden changes in their market(s). Initially this has been to preserve cash by maintaining revenue wherever possible and controlling costs. Those businesses that have been able to react quickly will have been able to do so by understanding their financials in detail which will be greatly assisted by having well-built financial models in place.

COVID-19 has forced all businesses to rethink their business models, and those that have reacted quickly to preserve cash and are focussed on building resilience will have a better chance of realising that there will be new opportunities coming out of the COVID-19 crisis.

What better way of understanding what drives a business, than to take each key component of a business and build it into a model that can be easily adjusted to test multiple scenarios and strategies with the objective of maximising efficiencies and growth?

BDO’s Financial Model Build team, led by Janie Reid, has a winning formula to help our clients through the crisis and into recovery. Their tried and tested approach to model building has enabled many of our clients to successfully endure through COVID-19 and has helped to put them in a stronger position to realise the opportunities emerging from the crisis.

Many of our clients build their own financial models, and our Model Build Team offers clients a free ‘Fit For Purpose Assessment’ (FFPA) whenever a client approaches us to assist with a transaction. Although some models will be fit for purpose, a significant amount will not stand up to the rigours of a transaction process.  In our experience and from the feedback we have received from clients, BDO’s approach to financial model building adds real value and brings welcome clarity in times of uncertainty.

One example where the value of a good model becomes apparent was with a recent client in the heart of the COVID-19 crisis. The client approached the BDO modelling team to build a rolling 13 week cash flow model to help assess the impact of the crisis on their business and run various scenarios on the recovery of the business. The BDO team set about creating a model that would be flexible enough to assist the business in their cash flow management through this difficult time for them, but always wanting to exceed expectations and add value with their work, they kept an eye on how the model could be used going forwards as well. After seeing the user friendliness, flexibility, and business focussed outputs within the model, the client recognised the value that a good model could bring and was impressed enough that the team were commissioned to build a full scale operational model for the wider business.

To find out more about BDO’s Financial Model Build service and how it can help your business, please contact Janie Reid.