Financial model of the project: what parameters should be taken into account when building it
Before launching any project, it is important to analyze, and predict what difficulties may arise in the way of its implementation, what will be the result, and other important aspects. In addition, it is necessary to take into account the material costs that may arise during the implementation of the task. The financial model of the project, which shows the indicators of future income, expenses, and profit of the business in general, can help with this.
The experts of Attico.io IT company suggest developing such a report in three variants: basic, optimistic, and pessimistic scenarios. Each of them is based on figures and allows you to decide on further actions to achieve your goals.
With the help of a financial model, it is possible to test the success of this or that business step, for example, to calculate how many employees should be expanded or whether it is reasonable to open a new subdivision of the company. This type of report demonstrates the profitability of the project at different stages, taking into account such important parameters as seasonality, market dynamics, and risk level.
On the basis of the financial model, specialists outline large-scale goals, such as a significant increase in revenue, launching a business, attracting investors, and others. It is important not to confuse the document with the profit and loss statement, the latter reflects the data in terms of the historical picture. And the financial model predicts how events will develop in the future.
When developing this type of reporting, basic parameters are used, the key of which is the required time period for the forecast and which of the scenarios will be taken into account. Most often, the calculation of the financial model of the project is done for 12 months. In the case of a long-term strategy, the document can be compiled for a longer period.
In order to prepare the report, data from different departments of the company are collected:
- the sales department calculates the number of leads, conversion rate, and average purchase receipt;
- the human resources department provides information on the cost of hiring employees, employee turnover, and the size of the payroll;
- the production department provides information on plans for the production of products or services.
The development of a financial model based on the data listed demonstrates how much profit can be made, and which conditions affect the implementation of the project. In order to get the figure of expected profit, the calculation of revenue and all expenses are taken into account. In this case, it is important to consider the peculiarities of the sales funnel, as it may consist of several stages. In addition, when creating a financial model, they take into account various external factors, such as economic stability, currency fluctuations, and seasonality.
Any company has fixed costs, such as wage funds, office rent, utilities, and others. All of these parameters must be taken into account when developing a financial model.
