Financial Modelling for the Business and Household

If you only do one bit of accounting for your business, you should make sure it’s to take all of your income and overhead costs and simply enter them into a spreadsheet.

Make sure to include all income that comes in, as well as all costs that go out.

Set this up and ensure you repeat it for as long as possible (years even). What you now have is an overview of your finances.  You can check to see if they continue exactly as they are, if they go up, or if they go down.

You can compare where you are at in your business to where you were, and forecast where you will be in the future.

This is basically an accounting sheet but what it will allow you to do is to start doing financial modelling to look into your own financial future and even to test out ‘alternate’ futures.

What is Financial Modelling?

Financial modelling is a business term that describes the way you can predict the future and model ‘potential’ futures using these sorts of sheets. This is what businesses use to create projections for their profits over the next several years and how they create those upward sloping line graphs.

You can use this for your own business and likewise for your household finances in order to ascertain how much money you’re earning or losing.

Modelling Potential Futures

With this prediction of your finances you’ll be able to see how much money you have to reinvest at any point in the future and you’ll be able to see when your cash flow is at its most precarious. You can use this information to decide when to make investments and when to baton down the hatches.

Likewise, if you aren’t happy with how your finances are looking, you can also try changing aspects to see how this affects your profits and your revenue.

For instance, if you were to spend just a little less on one of your overheads – such as your electricity bill – how much would you save over the course of the month or the year? This informs you whether that’s a valuable saving worth making and whether you should go to the effort of executing it.

Alternatively, if you decide you want to make a certain investment in a certain amount of time, you can tweak your revenue and expenses in order to reach that goal.

Of course financial modelling isn’t an infallible glimpse into the future – but it’s certainly a powerful tool for households and businesses alike.