Why you need a financial model during crisis management
Updated: Feb 11
In a time of crisis such as the current Pandemic, Directors have many decisions to make on a daily basis. We are seeing directors make decisions around:
Revenue impact under various stages of shut down scenarios
Impact of Government support
These decisions need to be supported with accurate and timely information. A well-constructed financial model will provide the directors the ability to assess options and make informed decisions. Any financial model you use for decision making should:
Forecast your profit and loss, balance sheet and cashflow (Three-Way model). This allows directors to see the impact on funding and working capital requirements with each decision. The model should be efficient to change assumptions so as to not need rebuilding every time you want to change the scenario.
Allow you to easily stress test various scenarios and the sensitivity of your assumptions quickly and efficiently (Sensitivity Analysis). For example what does it mean to your cashflow and funding requirements if:
Sales are less than you thought?
Debtors days drag out?
You delay creditor payments?
You reduce staffing earlier or later than your base plan?
Be based on key operational drivers of the business rather than generic % growth factors (Driver Based). This will allow you to assess changes such as:
Increased discounting on $ per unit basis you may need to employ to maintain sales
Any rent relief you may be able to negotiate with your landlord
Changes in debtors and or payables periods
Staffing numbers as employees are scaled back including the potential effect of employees drawing on annual leave entitlements from your cash reserves.
Have built-in error checks throughout so you will see instantly if a change generates an error in the model (Error Checking). This will give you more confidence in the outputs of the model and therefore allow you to make more confident decisions as you navigate this crisis.
Allow you to communicate with your financiers your plan so they have confidence in your plan (Stakeholder Management) and will be more supportive of your business.
Identify funding shortfalls early (Capital Requirements).
We are available to assist you build your financial model to support your decisions and plan for the coming challenges. Please click here if you would like someone to contact you regarding assistance.