Financial Modeling for Investment and Business Projects

Financial Modeling for Investment and Business Projects

Financial Modeling for Investment and Business Projects

Published Jun 1, 2022 


67 Articles

The development of a new investment project and the search for funding sources are labor-intensive processes that require high professionalism of the financial team as well as affordable funding sources.

Havelet Finance Limited is ready to offer long-term financing for new business projects on flexible terms. We also offer large companies comprehensive financial modeling and consulting services.

The essence of financial modeling

Financial modeling has some common features with the concept of financial planning, which can be viewed as a projection of economic processes in monetary terms. The above definition is broad and covers planning both at the macroeconomic level and at the level of a specific investment project or company. Any financial model includes the most important factors of economic processes and the relationship between them, reflecting these factors and relationships in monetary terms. Financial modeling assumes a systematic approach to investment project management, covering all areas of business activity. Financial modeling is critical to evaluating any business model. The goal of financial modeling is to answer the question of whether a new business project can provide adequate return on equity and create sufficient value for the owners of the company.

Over the years, many financial modeling tools have been developed, such as forecasting methods, capital budgeting methods, company assessment methods, risk assessment methods, and so on. Some of these methods can be successfully used to analyze a specific business model from a value creation perspective. However, these methods should be adapted to the requirements of each investment project and the needs of the client. Financial modeling is the quantification of the goals to be achieved in a new business project. A quantitative assessment of these goals is reflected in the form of various types of financial forecasts.

Development of a financial model for new investment and business Projects

The design and structure of the business model determines the structure of the applicable financial model, which is usually generated using a spreadsheet. Some experts argue that the current concept of business modeling came with the development of spreadsheets, which greatly improved and simplified financial modeling.

An integral part of any business project is the modeling of sales revenue as well as the value chain. In each case, financial modeling is usually preceded by a series of studies or processes adapted to the requirements of modern strategic management and business planning.

Both revenue and value chain models make assumptions about sales revenues, operating costs, and investment costs. Professional assessment of various economic indicators allows a business to predict profit and loss by separating different levels of financial result, balance sheet and cash flows. These forecasts should be adjusted to meet the information needs of a particular customer.

The basis of financial modeling for new business projects should be the present value of the projected free cash flow for each of the owners of the enterprise (FCFE — Free Cash Flow to Equity). This metric indicates whether the specified business model can generate acceptable results for them. If the business model fails to generate satisfactory value for the business owners, there are two options. 

The first is to abandon the implementation of a new business model, and the second is to develop and test a new model. In the second case, the finance team brainstorms new decisions about the shape of the future business project and selects the most appropriate ways to finance it based on previously made forecasts of sales revenues, costs, operating expenses and other financial indicators. As part of this process, the financial model of a future project may undergo significant changes, which usually have a positive effect on its results. In any case, the main task of our team is to find the best solutions that provide a satisfactory level of value created for the owners. The most appropriate financial model should be used to validate proposed ideas for redesigning the business model in terms of creating value for business owners.

The importance of financial modeling for business

Financial modeling enables businesses to support the development and implementation of the most appropriate business models that can create maximum value for customers and generate a satisfactory rate of return for owners.

For this reason, financial modeling should be carried out in parallel with the development of an innovative business model for the future project

The importance of financial modeling for new business projects is characterized by the following:

Financial modeling is iterative in nature, so the many options presented give the customer the broadest choice.

•Financial modeling for evaluating a new business model is fundamentally different from financial modeling used for evaluating an existing company, requiring specific approaches and solutions.

•The simulation results allow the business to choose the most promising and least costly way of implementing the project using the best ways to attract investment, increasing the chances of project success.

The ability to compare different options, financial instruments and mechanisms provides tremendous benefits to investors. If the proposed financial model indicates the impossibility of obtaining a satisfactory rate of return for the owners of the enterprise, then the design of its individual elements should be rethought. Any change in the business model must be reflected in the financial model. Thus, the idea is tested in terms of creating value for customers as well as for the owners of the company. The financial model, reflecting the financial effects of a new business project, guarantees a comprehensive and systematic approach to its development.

If you are looking for professional financial services or need financing for large investment projects, contact Havelet Finance Limited. An international financial company with an impeccable reputation and a vast geography is ready to help in the implementation of the most daring business projects in the energy, oil and gas sector, infrastructure, heavy industry, agriculture, tourism and other areas.

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