Cash Flow – a Piece of the Financial Model Puzzle
The financial model of a business talks about how reliable it is and its vision of growth. Cash flow is an important piece of this model and completes the overall image of its financial worthiness.
What is a Financial Model in the first place?
When we speak about a company, the financial model is a representation of its financial situation, which is often used for forecasting, business valuation, managerial decision-making and financial analysis. Whoever builds such a model quantifies variables, builds formulas and depicts mathematically a business component or event.
How does cash flow fit in the picture?
Cash flow is one piece of the financial modeling puzzle of a company. Once you have an accurate and up to date cash plan, things fall into place and the broader image is clearer. When it comes to strategic planning, cash flow scenarios are essential in building financial projections. Moreover, if you have the flexibility to easily test different variables and hypothesis, the output of the financial model will speak even more to you.
“Financial modelers”, people with financial studies, usually build such models. However, it’s up to the managers to track the company’s cash flow and build forecasts, which will be used as input in such models, Once the financial analysts have a good cash flow plan at hand, they can focus more on calculating the cost of capital or the budget for a future project, as well as the efficient allocation of corporate resources.
Needless to say that a good financial model can make a huge difference for a future investment or exit.