Summary:
Pro Forma Models provides financial projection support to entrepreneurs and business owners
Financial models help entrepreneurs determine the feasibility of their business
Financial projections are required by investors to evaluate the financial viability of their investment
Financial models provide a roadmap for the future
Financial models help entrepreneurs identify strengths, weaknesses, opportunities, and threats
Pro Forma financial models, which can also be referred to as budgets or projections, are a critical tool for entrepreneurs looking to start or grow a business. Entrepreneurs must understand the financial aspects of their business in order to make informed decisions, access financing, and achieve economic success.
Some entrepreneurs and business owners may view preparing financial models and projections as cumbersome and a waste of their precious time. In this post, we will explore the reasons why entrepreneurs should prepare pro forma financial models, budgets, and projections.
Feasibility:
Financial models help entrepreneurs determine the feasibility of their business idea. By projecting future cash flows, entrepreneurs can assess if their business idea is likely to be profitable. This information is crucial for entrepreneurs looking to start a new business or expand an existing one, especially if they need to raise financing (equity or debt). Understanding the financial viability of their business, entrepreneurs can make informed decisions about how to allocate their resources.
Financing: Financial projections and budgets are required by equity investors and debt lenders to evaluate the financial viability of a business before they commit their capital. For example, when seeking a loan, a lender will typically demand a detailed financial plan, including projections of future cash flows showing conviction that the business will be a going concern and able to service their loan commitment without breaking covenants. Financial projections demonstrate that the entrepreneur has thoroughly thought through the financial aspects of their business and has a solid plan in place to drive revenue, manage expenses, and allocate capital. This can increase the chances of securing funding and help entrepreneurs to negotiate more favorable terms with equity investors and debt lenders.
Planning & Tracking: Financial models provide a roadmap for the future and allow entrepreneurs to track their actual performance against their budget expectations. By preparing a budget, entrepreneurs can establish clear goals and objectives for their business. Over time, business owners can compare their actual performance to their budget to see if they are meeting their goals and identify areas for improvement. The process of budgeting, monitoring, and adjusting helps entrepreneurs to continually evaluate their performance and make data-driven decisions about how to allocate resources and prioritize actions.
Resource Allocation: Financial models help entrepreneurs identify strengths, weaknesses, opportunities, and threats to make data-driven decisions around resource allocation. For example, if a financial model predicts that a business is running low on cash, the entrepreneur can take proactive steps to address the issue, such as securing additional financing or cutting costs. Financial models also allow entrepreneurs to make informed decisions about key business decisions such as pricing, product development, staffing and marketing.
Financial models, budgets, and projections are essential tools for entrepreneurs and business owners looking to start or grow a business. They provide valuable insights into the financial feasibility of a venture to prepare a business plan, secure financing, monitor performance, and allocate resources to optimize performance. Preparing financial models can help entrepreneurs increase their chance of success and avoid costly mistakes. While the process of preparing financial models may seem daunting, it is a worthwhile investment of time and resources for entrepreneurs looking to achieve their goals. Pro Forma Models provides institutional-quality, reliable, and affordable financial models to assist entrepreneurs and business owners with their business planning and financial projection process. If our library of Pro Forma Models do not fit your needs, we take on custom financial modelling engagements to work directly with entrepreneurs and business owners to develop their business plan, financial projections, and secure resources for their business.
Please see below for a selection of some top selling financial models that clients have used to prepare financial projections and budgets for their business: