Uses of a Model

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Financial Modeling & Business Planning > Uses of a Model

Once basic issues relating to markets, sales and operations have been fully researched and reviewed, a model can be used to generate the financial projections.

Financial models can be used for business planning, investment or funding appraisals and for financial analysis. Used effectively, a model can help prevent major planning errors, identify or evaluate opportunities, attract external funding, provide guidance, evaluate financial and development options, monitor progress etc.

Initial assumptions can be readily altered to evaluate alternative scenarios. For example, a model could be used to:

•	Explore the extent to which future sales can be increased while holding borrowing within predetermined limits.

•	Assess the effects of varying selling prices and/or volumes on net income.

•	Determine the optimum level and mix of future funding for a business.

For the management of an existing business, or promoters planning a substantial new venture, financial modeling can be an invaluable tool to assist the preparation of a business plan. However, business planning should not be confused with the preparation of financial projections. Sound planning should provide the basis for financial projections that can be derived arithmetically by a model. A financial model and its forecasts should contribute to, but never dictate, the contents of a business plan.