How to find the real insights in a financial model
There’s more to a financial model than just its financial statements. Here are some ways to use it to get a deeper insight into the organisation it is forecasting.
In an integrated financial model, alongside forecast financial statements, a dashboard often helps you drill down the model outputs, helping you access different levels of detail and test assumptions for yourself.
But once you’ve explored the dashboard, got a grip over the financial projections, and brushed up on your accounting ratios – where else can you look for more information? There is exceptional value in looking at how the forecasts are constructed, as this can give you insight into how the business operates.
Here are some places where you should look within a financial model to get deeper insight into the organisation.
1. Go deeper into the revenue assumptions
Look at how detailed (or not) they are.
- How have they structured different types of revenue streams?
- How has each revenue stream been forecast?
- Where did the base data come from?
- Are the assumptions detailed enough, or too simplistic with lots of overrides?
- Are there certain drivers that are so sensitive that a small change in them will cause dramatic fluctuations in the projections?
2. Look at fixed vs variable costs
A well constructed model will contain detailed splits between fixed, quasi-fixed and variable costs, and how they each link to transaction volumes.
Looking at these should give you an insight into what each revenue stream’s operations consist of and how risky they are at a segmented contribution level. You’ll also be checking if costs have been modelled appropriately – often at a cost level, broad-brush assumptions are made, but only sometimes are these okay to do and immaterial to the forecast.
3. Stress test assumptions to analyse their impact
Change inputs to very big, small and negative numbers to check that they work as you would expect. You might find some unexpected results and see how some of the extremes or limitations of the assumption parameters have been modelled.
You'll also get an initial view as to how well the model has been created and whether it will break or stop working when certain parameters have been exceeded. This could highlight the need to get the model independently reviewed or rebuilt.
4. Create additional dashboards to explore deeper
If you see any interesting outputs within the model that haven't been linked through to the output sheets, you can quickly create your own dashboards by pasting links or linked images into a new sheet or an existing dashboard.
This might, for example, be certain slices of revenue that you're interested in or other granular segmented information that's only used in a calculation stage in the model. Use charts, pivot tables and pivot charts, what-if analysis, and conditional formatting.
5. Look for hidden data
Are there hidden sheets? Are there any macros and buttons? Hidden rows and columns with data in them?
There can often be interesting data in sections that have been hidden for ease of use. Likewise, having a look at what a macro does (some basic VBA knowledge would be helpful!) can be interesting to understand what they're doing.
At Birmingham Analytics, we are passionate about understanding how businesses work. This is why we love diving deep into the underlying drivers of our clients’ businesses when developing forecasting models.
For us, building a financial model is far more than generating financial statements: it’s really all about understanding the business and how it works, translating that into the most suitable forecasting method, and making the assumptions and calculations as easy as possible to read and update.
If you’re interested in hearing about how we can help you, please get in touch.
