Compiled by Jeemit Shah
What is a financial model?
A financial model is created to forecast an organization’s financial performance over time. In old days these kinds of models were done with mind mapping, thanks to technology complex workings are now typically built-in Excel, with historical data used to help forecast how the organization will perform in the future. Financial models play an important role in helping firms make important decisions, such as whether to invest in a project. A model is a basis for any decision that involves forecasting the future of a company.
What Does a Financial Model Typically Include?
Financial models typically include pro forma versions of a company’s balance sheet, income statement, and cash flow statement. However, the emphasis on each particular financial statement may vary according to how the model will be used. Management consultants, for example, might focus more on revenue improvement and therefore focus their attention on the factors that drive revenue.
What is a B2B business?
Business-to-business (B2B), also called B-to-B, is a form of transaction between businesses, such as one involving a manufacturer and wholesaler, or a wholesaler and a retailer. Business-to-business refers to business that is conducted between companies, rather than between a company and individual consumer.
B2B transactions tend to happen in the supply chain, where one company will purchase raw materials from another to be used in the manufacturing process.
Things to note in a B2B model:-
- The most important thing to figure out is the market size, TAM and SAM for the particular industry (not just current but future as well). Next in line is the number of target customers that we can approach in order to move our product. In most B2B businesses the target customers are the shops that sell the product that the company is offering. These 2 things together will help in determining the target sales of the company and in turn the valuation of the company.
- In order to achieve the sales that are being forecasted we need to check the costs that have been incurred to achieve them and determine if they are sufficient or not. Like incentivizing the sales representatives,additional marketing costs.
- Other important things to look at are the characteristics of the business like if it is capital intensive or not, does it enjoy healthy margins or not etc. Like energy firms or mining firms require huge capital requirements whereas businesses like financial services do not require as much capital. Software businesses enjoy fat margins whereas grocery businesses do not.
- In order to evaluate the business we can look at Key Performance Indicators which show whether the business is doing or not like Revenue per employee, Customer Acquisition Costs, Return on Equity, Return on Assets, Average order value, Profit Margins, etc. When these KPI’s are in line with the industry average then the company is said to do well and when they are below the benchmark then we can conclude that the company is not working in the most optimal way possible.
A great example of a successful B2B business is IBM which has operations in 170 countries and has a market cap of $127.97 Billion.