Financial Modeling

Financial models are based on a building block approach, a true "bottoms-up" exercise, whereupon subordinate schedules will feed the income, cash flow, and balance sheet. Therefore, as you are developing various schedules, make sure you are adding assumptions along the way. 

Assumptions are key to modeling your company. Change the assumption, you change the model. In almost every worksheet in the software program, you will have the opportunity to press the "Assumption" button and register your assumptions as to where you are sourcing inventory, the need for a piece of capital equipment, etc. 

As much as you are preparing this financial model for others, it is really an invaluable tool for you. Once you assemble your model, your contemplation should be on your attention to detail in that the numbers you are inputting will translate to the actual (in the ballpark) of what you are pursuing.

In every situation, the fear is not that you have all of the line items right, the concern is that you overlook or miss putting them in at all. This can be a costly mistake, and such an oversight can be enough to incur not just a loss of profitability but complete failure of the enterprise.

The lesson here is to evaluate other companies, if not those directly in your space, those that are at least "cousins," so you may institute a fair representation of the company you are modeling.

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