How to Get Quick Insights From a New Financial Model
So, you’re ready to invest in building an incredibly granular financial model that can handle anything and everything.
It’s going to have all the bells and whistles and tell you everything you need to know about sales-channel profitability, SKU profitability, and cash flow.
First off – let me say that I’m proud of you for making this decision.
Too many brand owners don’t realize they need a financial model until it’s too late.
But before you get started, let me warn you about something.
I used to think that the usefulness of a 3-statement financial model was determined by the granularity of the model's drivers.
When I was CFO at Guardian Bikes, I had a super granular model that included:
Unit economics by SKU and sales channel
Headcount costs by vendor, position and employee name
Inventory replenishment forecasts by SKU and 3PL warehouse location
Building this level of detail into the model literally took years of iteration and advanced-level Excel formulas.
What did I learn from building it?
A lot of the model’s granularity was useless. It rarely got used in practice.
This experience taught me:
Financial models should only be as granular as needed to make sound management decisions. Anything more granular is a waste of time.
The 80/20 rule applies to EVERYTHING, including building financial models. In other words, only 20% of your models’ drivers and assumptions will provide 80% of the decision-making value.
My response to this learning?
A concept that we at Free to Grow CFO call iterative financial modeling.
Our unique process essentially looks like this:
Get a simple “MVP” financial model up and running within one to two weeks, which provides the ability to quickly make confident decisions.
Iterate on the financial model monthly, making it more granular and sophisticated by aligning model drivers with the 20% of strategic and tactical drivers that create 80% of the company’s desired results.
Step 1 - Get a basic “MVP” model up and running within a week or two.
When you have no financial model, going from nothing to something basic is a game changer.
Because of this, we launch a simple “MVP” financial model within a week or two for all our clients.
Our MVP models help brands understand the major drivers of their contribution margin, fixed overhead, and conversion cycle.
Simply modeling these 3 drivers of financial health provides immediate strategic and tactical decision-making value, without all the bells and whistles of more granular model structures.
And the best part about it?
You have this valuable tool available at your fingertips within two weeks of starting to work with us!
Step 2 - Iterate on the model’s drivers every month.
Once we have the basic MVP model up and running, we establish what we call the “monthly model roll process.”
In a nutshell, this process involves rolling the model’s time horizon and assumptions forward each month after the books are closed.
During the roll forward process, we take time to iterate on the model’s assumption and driver structure.
Why is this important?
Because our CFOs are establishing a monthly rhythm of improving your brand’s model continuously, always taking care to build in the 20% of model drivers that really move the needle on your strategic and operational plans.
The Benefits of Iterative Financial Modeling
Benefit 1 - Within a week or two, the brands we work with get profit and cash flow model insights that help them make important decisions with confidence.
Benefit 2 - Several months later, as the model evolves into something more granular and sophisticated, the model's drivers are comprised of the 20% of profit and cash flow levers that truly matter to the business's strategy.
Summary
So, in summary, when it comes to building a financial model for your brand...
Set up a basic MVP model quickly. Quickly building something usable is better than having nothing. Don't waste time guessing what the "perfect" set of model drivers is. Instead, just get started and hold fast to this: continuous improvement and iteration is the name of the game.
Interested in having a 3-statement financial model built for your growing Ecommerce brand?
Click here to book a call to learn how we can help you.
Until next time, scale on!
