The need to run business model numbers.

When considering a new business model, proponents must first conduct a qualitative review, that is, determine whether the story behind the model makes sense. There must be a logic behind adopting the model and a compelling case that it will be supported by your target audience.

After the qualitative review is complete, it is critical that a comprehensive quantitative review be carried out. Our experience is that too many business owners and managers ignore this vital stage of business model assessment. Unfortunately, many believe that hard work is done once they have established a credible story on how they will make money from their proposed business or project.

For every possible business model, there is a unique set of variables, both technical and financial, that will influence business performance. It is not enough to test the moves on one key variable at a time. When testing new business models, it is imperative that any combination of key variables can be tested simultaneously and quickly to assess the likely impact on financial performance. This can only be achieved by using a custom built-in model that has been designed for this purpose.

Financial projection models

A crucial first step in designing an appropriate financial model for this purpose is identifying all the key factors that underpin, and the variables that may affect, the financial performance of the proposed new business, business unit, or project. This process is also crucial when considering an expansion, a merger or an acquisition. Then, comprehensive, sophisticated, and customized financial forecasting models must be designed and built to incorporate these drivers and variables to project likely financial performance over a selected period, typically five years, and assess financial viability.

Done correctly, these financial viability assessment models can become valuable management tools that can be run repeatedly to project financial performance by month and year under all anticipated operating circumstances. Of particular importance, cash flow patterns can be mapped and analyzed to identify probable maximum cash requirements in all contemplated scenarios, allowing debt and / or equity financing requirements to be planned in a timely manner.

All companies differ in the scope and range of variables that can impact financial performance. Well-designed and well-constructed comprehensive financial models must be able to easily and repeatedly test the effects of changes in all variables that may have an impact on the financial performance of the business, project or entity in which it is invested. Importantly, they should also be able to test all relevant permutations and combinations of relevant sets of variables, and estimate the effects of both upward and downward deviations from the anticipated scenario.