1. What do we mean by financial planning?
Financial planning is what an organization does to put numbers to their strategic plan. It is the quantification of what the entity plans to do, the revenues it plans to create, the related costs and the resulting bottom line.
2. What is wrong with pro formas?
Pro formas, or projections, are a good starting point for financial planning. They are created from our assumptions which come from our assessment and strategic plan. If all of our assumptions are correct, pro formas work well for a single outcome. But what happens when some of our assumptions turn out to be wrong? What do we do when things change during the year? Pro formas are static & don’t allow for the adjustments that invariably are needed each year.
3. Why are models simply better?
A financial model is a user-friendly spreadsheet(s) customized to the organization’s specific needs that allows them to test every possible variable they could run into to see the results. This allows you to 1) makes projections and then 2) answer ‘what-if’ questions and 3) create alternative scenarios. Models are dynamic. There are 3 basic areas in every model:
- Inputs (assumptions/variables)
- Outputs (results/outcomes)
When properly built, models allow the user to change any inputs & instantly see the resulting outputs. It can be used to test alternatives before commitments are made; to make adjustments during the year and to see the impact of changing conditions in real time.
To improve your model beyond the basics you can use tools like Data Validation to both instruct users & to limit inputs; Macros to automate repetitive tasks and drop down menus to provide limited appropriate choices for inputs. We can provide you an almost unlimited array of options to make you model do what you want it to do.
Contact Build It Backwards(SM) today and let our consulting services give your organization the foundation to succeed well into the future.