Importance of Dynamic Financial Modeling
How many times have you reviewed a financial forecast and thought it was perfect? How about presenting your model to a group of executives where no one has any adjustments or feedback on the forecast? An experienced financial analyst will tell you there’s no such thing as a perfect financial model and almost everything is subject to change and will change before the deal is finalized. This is why it’s important to build a dynamic financial model where you can quickly change the variables to show how they affect the financials and ultimately the valuation.
The most important items to identify when building a dynamic financial model are the variable inputs that drive the underlying assumptions of the forecast. This usually starts with the revenue model before you identify the expense variables. The ability to quickly change growth rates, customer acquisition targets, benchmarks, start dates on projects, hire dates and other variables will save you both time and money.
It’s important to be able to look at dozens of different scenarios and change tactics accordingly. If your forecast is rigid and not easily adjustable for different scenarios it’s going to be useless if new information or conditions drastically change. The next time you’re working on a financial model be sure to review all of your variables and make them easily adjustable.