One of the first jobs in when I'm appointed to provide business sale, merger or acquition advice is to prepare a financial model. I also use it to provide financial advice to business owners to look at different strategic options.
A financial model is used to understand what drives the cash flow of the business and forecast cash flow in the next few years. This allows the client (and a buyer/seller) to really understand what is driving their cash return.
The model is called a 3-statement model because it includes the P&L, balance sheet and cash flow statements, statements that are connected in the model. It looks at historical data and users the key drivers of the business to forecast future earnings and cash flow.
The drivers differ by industry but may be gross margin %, volume, price or overheads or lack of free cash flow from within the company, too much or too little leverage, the dividend policy etc.
Investment bankers, unlike accountants or business brokers, need a cash flow forecast to value the business for a seller. They also need to show the client synergy benefits in a merger or acqusition.
The board of directors and senior managers also use it to forecast the financial outcome of different strategies, so it is also a strategic tool that can provide real insight into a business.
Contact me to find out more.
(I'll be writing more about financial modeling in my articles soon).