5 Common Mistakes When Preparing Financial Models

February 16, 2022

The documents your firm presents to investors or financial institutions are necessary to give them a complete financial picture. This helps them make a solid business decision regarding your business, and for this reason, you want to avoid common pitfalls. It is best not to rush this process, as you’ll need to portray your company as accurately as possible while also demonstrating your projected successes. 

Language Is Too Muddled 

It is understandably difficult to boil down your operations into its most basic components, however, this is exactly what you need to do. If your core concepts are incomprehensible to those reading, it can negatively impact the way in which your request is received. 

Ask yourself a few questions to help get the ball rolling. You can begin with explaining what problem your company is working to solve. Who is your target market? Where do they shop, and what are their demographics? What is the end result for someone who purchases your produce or service, and who is your competition?

The Use Of Random Figures To Project Income

It is absolutely essential when creating a financial model that you use precise information and that you are able to document your sources. You cannot simply plug in numbers that do not have a real-world application and a quantifiable origin. Careful planning is needed in this regard, and this mistake is often made due to a lack of financial expertise. 

Future revenues will factor in greatly when devising your strategy, and so, these cannot be based on guesswork. It certainly can be a challenge to ascertain transactions that have not yet happened, and so these metrics must be formulated in conjunction with your methodologies for reaching your goals. 

Funding Needs Are Not Adequately Expressed

To go along with the previous point, you must resist the urge to overestimate your earning potential and at the same time, you need to not underestimate it, either. Your investor needs to know where they fit into the picture with your business plan. 

Some questions to get you started are why do you need funding and what do you plan to do with it? Make sure that these answers are concise and easy to comprehend for someone who is not well-versed in your particular industry. Strive to demonstrate what your firm will be able to achieve with the help of your investor.  

Leaving Assumptions Unexplained

You are accustomed to the day-to-day operations of your company, but your financial backer will not be. For this reason, it is imperative to define absolutely everything. It cannot be assumed that investors will inherently understand what is being said unless it is explained to them.

Your company story plays into this heavily as well, as it lets them know where you began and where you intend to go. Incorporate vital pieces of your firm’s history that help create a big-picture view of how things came to be. 

Failing To Understand Scaling

It is certainly the objective of most businesses who seek funding to grow larger, and you’ll need to show your potential backers that you understand what this entails. You will need to think through what these changes will necessitate, working through these scenarios on paper. 

It is likely you will need more employees and that costs will increase as production goes up. Advertising can also incur serious expenses, and you’ll want to calculate how this will be offset by higher revenues as you expand into other markets. The more thorough you are with these projections, the more confidence you will inspire. 

AI Capital Advisors can provide you with the oversight needed to help prepare your materials to secure financing. Put your best foot forward with your investors, and contact us today to find out how we can be of service to you. 

Photo courtesy of Pexels

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