A prerequisite for understanding and making business decisions is to understand its financial consequences. For a proper understanding it is necessary to consider alternative options, to analyse various scenarios of key input variables and to perform sensitivity analyses of output data to changes in input data. Financial models are used to explore all such aspects in making business decisions.
A financial model based on specified input parameters provides a forecast of future cash flows, from where balance sheet and profit and loss statements as well as key financial ratios are derived. The main advantage of properly compiled financial models is the maximum variation of input variables. A financial model must allow users to arbitrarily change input variables and must provide a simple way to reach the corresponding outputs, for example by pressing a single button.
Financial models are a useful tool providing the necessary information for making business decisions. Situations where the use of financial models can be useful include:
- Investors willing to pursue a project need to determine alternative ways of funding the project in order to obtain sufficient returns on investment of own funds.
- Investors looking for senior debt financing have been asked by their bank to substantiate the project by a detailed financial model showing sufficient cash flows to repay senior debt and meeting certain financial covenants (e.g. DSCR, LLCR, PLCR) and meeting certain reserve fund requirements.
- Investors bidding for a public contract are required by the contracting authority to provide a financial model in accordance with the requirements and parameters specified in the tender documents. Such financial model will help the investor prove that the project generates the desired return on investment while reflecting the requirements of the contracting authority, banking institutions and other stakeholders.
- A public sector body has in stack a number of projects and wants to decide which ones to implement on the basis of a financial structure with a limited impact on the public budget while also ensuring its most effective use.
- A public sector body is preparing a specific project and as part of the feasibility study validates its economic aspect. It examines the process through which (traditional procurement, PPP) and how the project can be financed (budget, external funding, private sources).
The above selection only provides an overview of situations where financial models typically are used. However, at Infra Advisory Ltd we believe that financial models should be part of every business decision, in particular those with fundamental importance to your organisation.
At Infra Advisory Ltd we have unparalleled experience in creating tailor made financial models that will fully cater for your internal needs as well as the needs of your external partners and debt providers. We always build our models from scratch applying the industry’s best practices.
Preparing financial models is a complex and time-consuming task that requires specialist knowledge and skills: financial modelling professionals therefore can ensure that a financial model meets all the requirements of internal and external stakeholders while considerably saving your financial resources at the same time.
If you are interested in educating your own team and in learning more about best practices in international financial modelling, do not hesitate to contact us at Infra Advisory Ltd and we will prepare a training to fully meet your requirements.