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5 min read

5 Financial Modeling Myths

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Do you have a financial forecast model in your business that is updated regularly?

Have you projected your Income Statement, Balance Sheet, and Statement of Cash Flow for at least 12 months?

No matter the size of your business, a financial forecast model is essential for success because it helps you plan and make crucial business decisions.

However, are you having these thoughts right now?

  • “I’m too small to have a forecasting model.”
  • “I don’t know all the variables yet, so I’ll wait until I have more information.”
  • “This is a waste of time. I need to just bring in more business.”
  • “I don’t have the time.”
  • “I don’t know how to do this, and accounting reports such as these make no sense to me.”

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1. Business Size Matters

“I’m too small to have a forecasting model.”

You are never too small to have a good forecasting model. If you are a start-up, it is helpful to build out a model to understand all the variables needed for success. The act of building out the model will bring different expenses, revenue ideas, and cash flow requirements to the surface.

Remember: No matter how much time you spend on a model, it will not be right. It will be outdated as soon as you finish. It is not about being right; it is about having a plan formulated in your mind for success. You will get more accurate, but it will never be completely right.

The more you forecast, the more you understand your business, your customers, and the competition. A forecasting model is crucial no matter the size of your company because it will help you make a plan for your business. 

2. Complicated and Unknown Variables

“I don’t know all the variables yet, so I’ll wait until I have more information.”

We’re never going to know all the variables. Sometimes, we actually know very few variables. But, people know more than they think when they put it together in a model.

A financial forecasting model does not have to be complicated. I’ve developed a forecast template that can be put together in 1 or 2 hours depending on the complexity of the business. 

I understand the desire for perfectionism, which many times leads to procrastination. I like the quote by the founder of LinkedIn, Reid Hoffman, “If you are not embarrassed by the first version of your product, you’ve launched too late.” In other words, if you aren’t embarrassed by your first financial forecast, you waited too long.

3. Not Valuable

“This is a waste of time; I need to just bring in more business.”

I totally get that analysis paralysis can keep you from doing anything. You could spend days on a financial model with multiple versions. 

I put together a model for a start-up recently, and we had departments and then reference sheets that tied out to the departments. The totals of the departments tied to the P&L. The Excel file got so complicated that one change in the model created hours of work. I realize you can set up a spreadsheet to prevent this, but you can also spend too many hours setting up a bullet proof spreadsheet that will probably get destroyed once someone hacks it and writes over a formula.

However, the point of a forecasting model is to quickly assess your revenue streams, expenses, profit, and cash flow. The information the model gives you can provide a sense of urgency or possibly less anxiety since you have a better understanding of what you need to accomplish to meet your financial goals.

4. Time Consuming

“I don’t have the time.”

We all make time for what is important. A forecasting model ultimately gives you the focus and direction to use your time more productively. The financial plan and ongoing forecasts will allow you to measure your actual performance against goals, which is essential for success. 

Every quarter, you’ll need to pivot your goals and adjust. See the post “Pivoting Your Goals” for more information of the value of doing this.

5. Confusing reports

“I don’t know how to do this, and accounting reports such as these make no sense to me.”

I understand that accounting reports can be confusing if you aren’t familiar with them. If you are a business owner, it is in your best interest to understand the Income Statement, Balance Sheet, and Statement of Cash Flows. Accounting reports such as these are basic and help outside investors, bankers, CPAs, and other consultants and professionals better understand your business. Accounting is basically the language of business.

In summary, a forecasting model is essential to put together a framework of where you are now and where you are going in your business. There are many misconceptions about forecasting. No matter your size, no matter how much you know, no matter how much time you have, or even if you don’t fully understand, have a forecasting model that is updated regularly for your business.

If you want help creating a forecasting model, contact Bender CFO Services today!

Benefits of Outsourcing to a Fractional CFO