What is the financial and economic model?
The financial and economic model is a way to reproduce real economic processes (cash flow, material resource flows, product sales, loan repayment, etc.) in the form of mathematical dynamic links. For convenience, the models are formed in computer programs (in Excel, ERP-systems or more complex software modules).
Why may financial director, economist and top manager need these models?
First of all, they need them to calculate the consequences of management decisions before making them. With a well-constructed model, it is possible to think through various options and with an acceptable probability to predict planned results (for example, how the introduction of new equipment will affect the cost, how much the annual profit will fall when the sales outlets are temporarily closed).
With the help of models, one can predict financial and economic results, plan budgets, form a payment calendar and much more. It seems that many readers of the “Finance Director” in one form or another have already been engaged in building economic models. Therefore, we would like to identify the most important and general rules that need to be followed when building almost any model.
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Goals of the economic model development for business
Many small and medium-sized business companies under conditions of economic crises are forced to restructure fussy and random in order to survive. Sooner or later the crisis ends and the business starts to grow again. The only question is how to develop? The one who will grow spontaneously, the next crisis will catch at a weak moment. Companies, where the economic consequences of management decisions will be calculated and analyzed, have a chance not only to meet the crisis fully armed but also to strengthen their position by means of less prudent competitors. So, the economic model is an effective management tool at both the development stage and the period of forced business de-scope.
What do business owners get by using the economic model development service?
As a result of the work of economic model development agency KATASIS, the company owners receive a tool to calculate the forecast of the financial result and risks of each business development option. The decision, as always, remains with the person and at this moment intuition and leadership experience will be needed. It is important that the decision is made on the basis of objective data, and not emotions, which may fail.
Economic model development stages
Building a model begins with the formation of income and expense budget. In the usual budgeting variant, the planned values of income and expense are constants determined during the formation of the budget on the basis of statistics from the past period and plans of the company. When building an economic model, these constants in expenditure items should be replaced by formulas that depend on parameters, and with such detail that allows you to simulate various options for reducing the business.
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Special attention should be paid to forecasting the revenue side of income and expense budget. For example, for companies operating in the industrial market, the most reliable forecast is based on the forecasts of the largest customers. For companies operating in the FMCG market, you can use the statistics of the past period, adjusted to reflect analytical data on the reduction of consumption in the relevant market during the crisis period.
The next stage is the construction of a cash flow budget (CFB). It is calculated on the basis of income and expense budget and a number of additional parameters. To calculate the CFB, such parameters are used as turnover in the warehouse, terms of payment for sales by customers, terms of payment for suppliers of goods and services, sales plans, plans for investment and financial activities.
Thus, we get the income and expense budget and cash flow budget, where the data depend on the simulating parameters and we can proceed to model the options for reducing business.
What does economic model development company KATASIS do?
Companies which need to move to a qualitatively new level of financial management, for which it is important to forecast, plan and anticipate every step in investment and operations, is urgent to be ahead of the competition often contact us. Our experience and knowledge in the field of finance allow us to develop financial and economic models with a high detail degree.
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During the development process, an investment plan, an operational plan, and a financial plan are projected. The economic-mathematical model is checked for financial feasibility. Based on a proven base model (probable scenario), pessimistic and optimistic scenarios for project implementation are simulated. The final stage assesses the investment and budget efficiency in all three scenarios.
If necessary, other types of performance analysis are carried out, for example, qualitative and quantitative risk analysis (sensitivity analysis, break-even, SWOT analysis, etc.), a complex of anti-risk measures is being developed. The economic model development is part of a service package that KATASIS provides in the field of finance. Contact us to order economic model development!