Do it with models; financial models

In the quest for the golden standard for financial decisions, the financial model has to be at the center of it all. A financial model is an institution: a place of reference, meditation, and decision making. The gospel of a business.

Though not legally mandatory, some would consider it a ‘crime’ not to have a financial model in their organization.

The reasons?

1.      It allows you to keep track of spend: what would it say of your business -or yourself- if you couldn’t explain how you spent money last month. A model will facilitate the conversation and also tell you how far off you are from a plan, giving you a chance to correct the course.

2.      It gives you a framework for analysis: you can use the mechanics of a model to figure out if a decision is good or bad. If well designed, it can frame the effect of decisions on cash, profitability, and runway. And it will do so without a tone, an attitude, or an agenda.

3.      It builds trust with investors: a financial model is an algorithm of checks and balances. This builds trust immediately. If the model is, on top of everything, easy to navigate, it becomes an investor’s sandbox. It becomes their tool to play, imagine, and dream. And you definitely want that.

Now, there’s also a soft reason to have a model.

It makes everyone comfortable.

Why?

Because uncertainty makes us uncomfortable, and a model reduces that uncertainty.

Though not a crystal ball, it helps lay out scenarios, strategies, and ambitious goals and anticipates how they affect your business. And this is certainly good for stakeholder’s comfort (internal and external), and certainly good for business.

If you want to make good decisions, get yourself a model.