Quinn Allan

HOW GRANULARITY AND FLEXIBILITY WILL DETERMINE YOUR FINANCIAL MODEL

Not all financial models look the same. How you put yours together depends on what you intend to use it for. You might need huge amounts of detail so that the financial model can be used to make a wide variety of decisions. Alternatively, it might a short-term analysis, looking at the viability of one specific scenario.

Some models are focused around the information decision-makers need to know about potential mergers and acquisitions, others about cash flow or comparing with similar companies.

The level of detail you need and how much flexibility of use is required determines the type of financial model you should opt for.
The type of financial model you use is determined by the level of detail and variety of use.

How granularity determines your financial model

As with many things in life, you can only plan with the information you’re given. Often, the more information you’re provided with, the more detailed your plan is. However, you might have access to all the data you could ever need, but it doesn’t necessarily all need to go into the model.

Imagine your business is looking at a new investment. To provide your leadership team with an indication as to the viability of this investment, you might first offer a high-level analysis. Rather than providing them multiple spreadsheets worth of information, you’ll give them the headline data.

If they decide that the investment is worth more discussion, then you may need to provide a more detailed analysis. Your second financial model might include a break down of different types of costs, liabilities and results, rather than an overview.

This approach naturally takes more work, so there’s no point doing it if it’s not required.
Determining the right financial model is about what information you need to display to make it useful.

Flexibility in choosing the right type of financial model

Flexibility is another key factor that determines the type of financial model you should use. Ask yourself:

Using the example above again, the high-level analysis will likely be used only once or twice. The second, more detailed analysis, might be referred back to, and adjusted as new information becomes available.

Once again, determining the right financial model comes back to time. Don’t choose a time-intensive option if little flexibility is required. Build exactly what you need, rather than a model that can be used over and over again, and allows for frequent changes or adjustments.

Not only does the right financial model help those who use it, creating it is much easier, too.

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