Financial Modeling & How Part-time CFOs Can Assist Your Business

Whether you are an entrepreneur with a startup business or a medium-sized established firm, you cannot overlook the importance of future financial projections, or financial modeling.  Perhaps you may be short on funds and unable to hire a full-time CFO for operations’ oversight, or perhaps you may still be determining the personnel details for your business; either way continuous and rigorous financial planning is always needed.  This is where a part-time CFO like Thomas Huckabee, CPA of San Diego, California comes into the picture.  Apart from performing other essential duties which a CPA offers companies, Thomas Huckabee, CPA is an expert in the areas of financial planning and financial modeling.  

What Defines Financial Modeling?

Apart from providing management with a broad picture of where a business stands from a financial perspective, the financial modeling process is designed to create a financial diagram of all business operations.  Nothing, however, is as important as the projection of cash flow and the generation of the cash flow report.  Indescribably intricate and highly mathematical, key operational and financial relationships concerning depreciation schedules, valuation statements, inventory levels, inflation and debt services are also built into the model.  Also considered in the final financial model are the impact of certain firm policies; as an example, any restrictions or covenants stipulated by any lenders and investors.  

Ideally, the outcome of all the diligent effort that goes into successful financial modeling, is a high-level (with appendix) information booklet that is easy to read and understand.  The idea is that the outcome of the financial modeling process is a report, which is a mecca of sorts, where scattered information is organized in a very streamlined and efficient fashion. A business always wants future endeavors to succeed- organizing financial data into one place makes this goal exponentially easier to attain.  

Cash Flow Forecasting  

cash-flowCash flow forecasting in the corporate and accounting sectors usually involves cash flow forecasting. Cash flow forecasting enables corporations to predict potential rises and falls in company funds by identifying sources of cash inflows and avenues by which cash may go out over the course of the given period.  A cash flow forecast typically represents sources and amounts of cash flowing in and out of the business over the course of a set year or quarter.  The designated period under analysis is then divided further into monthly or weekly segments.  In certain instances, when the model is particularly complex, the forecast may need to be divided still further into daily predictions. Regardless of the division’s your company ultimately chooses, they ought to be based on periods during which the majority of fixed costs, such as employee salaries, are paid.  Increasing Cash flows are an important factor in boosting the value of your business. If you are ever thinking of selling your company in the future, then cash flow projections are a metric that is used by an acquirer (M&A) to determine the valuation placed on an acquisition target. Buyers calculate the value of a business by estimating future cash flow and assessing the risk associated with generating that cash flow. A business that has a track record of sustainable or growing cash not only validates its product or service, but also demonstrates the management’s team’s ability to drive growth.  

cash-flow-projection-template“It’s important to identify your key assumptions about how cash flows in and out of your business each month.” Tom Huckabee of Huckabee CPA

Why is Financial Modeling Needed?

Consumer behavior is not always predictable, but often future trends can be predicted by historical data and patterns.  This is especially true when the individual making the predictions (CFO, analyst…etc.) is taking economic conditions in the general marketplace into consideration.  And, businesses must be well aware of where they stand before introducing anything new to the marketplace.  Here are some notes, separated by business size, that can be useful:

Small Businesses & Startups

Small businesses generally have extremely tight margins.  In the case of most small businesses, any sales generated are directly tied to cash flow- with cash flow predictions coming from financial modeling.   Of note is that, only in exceptional circumstances, is any credit offered to small businesses and startups from their respective vendors or customers.  Small businesses often underestimate the importance of models- this is not acceptable.  A financial model which takes everything into account, and could boost revenue and sales.

Medium-sized Businesses

Mid-sized business sometimes use financial planning…and sometimes they do not.  Normally, some form of financial tracking has been done but said financial tracking is nowhere near sufficient enough to cover and display the whole picture.  Research shows that the reason most medium-sized businesses have sub-par financial modeling in place is that they evolved from startups to mid-sized businesses.  Quite simply, these businesses were not prepared for the growth they experienced, and failed to develop a robust infrastructure to handle the new dynamics of their business.  

Large Businesses

If you own and operate a large business, you have most likely implemented all necessary processes to more than adequately track your financial transaction.  Most likely, you have an entire department devoted to financial analysis.

Starting the Financial Modeling Process

The financial modeling process is very complex, rigid and unaccepting of flaws- accuracy is a must.  Here are some points that we have outlined as crucial to a successful model:

  • More information is far more valuable to an analyst than just bits and pieces of paperwork- data tracking is paramount!
      • Document every financial transaction- even if it seems tedious
      • Have the ability to produce ad-hoc income statement reports
          • Income is typically tracked on a cash basis, but it must also be estimated
      • Have the ability to produce ad-hoc expense reports
          • Account for every dollar
          • Document if the expense is reoccurring or a one time cost
      • By all reports, keep the future cash flow forecasts realistic

A properly executed and detailed financial modeling process by your interim or part-time CFO will not disappoint, and will tremendously assist in the showing the big picture.  

Conclusion      

RECOMMENDATION
A cash flow forecast is the most important business tool for every business. The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business, than in.

A seasoned and qualified San Diego CFO and CPA professional will make certain that all areas of your business are taken into account during the financial modeling process.  This process should be taken very seriously and overseen and performed by the best individuals available.  Thomas Huckabee, CPA is the right person to act as your interim or part-time CFO.    

cash-flow-analysis-consultation-cta

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