Creating Financial Models

Because your financial projections represent the heart of your business plan, it is critical that you have a superb financial model that combines all the financial aspects of your venture. Financial models are usually produced with a spreadsheet program to allow the numbers to be linked, so that a change in one automatically translates into related changes on all of the projected statements and analyses.

Creating a model from scratch is an excellent exercise because it forces you to consider all the financial assumptions in your business plan and it will teach you how the model works before you make changes in future versions. There are several readily available spreadsheet tools that can help you:

Bankable Business Plans has many resources related to my textbook including sample spreadsheets that you can review and download.

One of the best spreadsheet models is Active Money produced by the Columbus Enterprise Development Corporation. It is comprehensive, all the tables are links, and it is free.

One of the easiest financial projections model is available on the Missouri SBDC website. Produced by Aldis Jakubovskis, this model is not overwhelmingly detailed but it clearly shows which assumptions have to be entered, and produces completed projected statements based on the assumptions.

Commerce Clearing House (CCH) has a very useful site for entrepreneurs: Commerce Clearing House Toolkit. It has model spreadsheets, as well as useful and up-to-date tax planning tools.

Find a plan with a financial model for a business in your industry. Many quality plans are available on Web sites for business plan competitions such as the MOOT Corp. Business Plan Competition at the University of Texas. Because of the large number of quality plans on such websites, you have a good chance of finding one for a business in your industry.

Excel templates are available with the CD that accompanies the MBA's Guide to Microsoft Excel 2002 by Stephen L. Nelson, published by Redmond Technology Press.

If you build your financial model from scratch or modify an existing one, there are several guidelines that you should follow:

Examine your finished model in detail. It is not sufficient to review the model to see if it "looks" correct. You must test it by proofreading it carefully and checking all the spreadsheet cell references and formulas.

Test the model by making changes to assumptions and checking to see if the changes flow through the rest of the model.

Compare the model to others for similar companies to ensure that it uses standard industry categories.

Have some of your advisors who are accountants, financial professionals, or people with industry experience, review the model.

Edward G. Rogoff
Bankable Business Plans
Newton Business Programs
Follow Me On Twitter
How to Write a Bankable Business Plan
Group Brainstorming Exercises