Numbers play a crucial role in any business, and being in control of your finances is essential for survival and growth. However, there are several financial myths that can mislead entrepreneurs and hinder their progress. Financial modeling, like many other fields, has its fair share of myths that can hinder people from fully embracing its benefits.
Now, you can check out what is financial modeling, here.
Meanwhile, in this article, we'll explore and debunk the top fifteen most common myths surrounding financial modeling.
Top Myths: Let us debunk them!
- Myth: You need to know VBA/programming.
Reality: While VBA (Visual Basic for Applications) and programming can be valuable skills, they are not mandatory for financial modeling. In fact, the use of VBA in financial models is often limited, and overusing it can reduce model transparency. Seasoned modelers tend to move away from heavy reliance on VBA over time. The key to best practice models lies in maintaining transparency and ensuring that calculations and assumptions are easily understood by all stakeholders.
- Myth: My business is too small to need financial modeling.
Reality: Financial modeling is not exclusive to large corporations; businesses of all sizes can benefit from it. Whether you are a small startup or an established company, financial modeling can help you organize and analyze data, inform business decisions, and improve overall efficiency and productivity. If you're unsure where to start, consider an Introduction to Financial Modelling course to integrate modeling into your business practices effectively.
- Myth: Financial models are complicated and error-prone.
Reality: While poorly designed models may be complex and prone to errors, good models are built with clarity and ease of use in mind. Skilled modelers aim to eliminate key risks by ensuring their models are intuitive and straightforward. Models should be easily navigable for designers, regular users, and newcomers alike. By adhering to best practices, financial models can be reliable and trustworthy tools for decision-making.
- Myth: Financial models can't be trusted compared to bespoke software.
Reality: Financial models can be highly trustworthy and offer advantages over complex systems. They are flexible, adaptable, and versatile, allowing businesses to make changes without relying on external IT experts. Unlike rigid, one-size-fits-all solutions, financial models can be tailored to meet specific business needs. While both financial models and bespoke software require maintenance, having an Excel expert on hand is often more feasible than an IT specialist.
- Myth: You need a formal qualification to be a financial modeler.
Reality: Financial modeling certifications are relatively new, and many experienced modelers do not possess them. While certifications can be beneficial, they are not prerequisites for entering the field. Anyone proficient in Excel can become a financial modeler with access to the right resources and guidance. Practical experience, coupled with continuous learning, can make one a proficient financial modeler.
- Myth: Numbers aren't my thing.
Reality: Understanding your finances is crucial for the success of any business, especially startups seeking rapid growth and external investments. Knowing and analyzing your cash flow, profit and loss, and balance statements are essential. Moreover, tracking startup metrics like cash burn, runway, recurring revenue, customer acquisition cost, and customer lifetime value helps entrepreneurs stay in control of their business and make informed decisions.
- Myth: Business structure doesn't matter; we can fix it later.
Reality: Choosing the right business structure from the start is essential. It impacts tax efficiency, decision-making with co-founders, and legal protection. Changing the structure later can be costly and time-consuming. Setting up a company and a discretionary trust is recommended for many startups, but each case should be evaluated individually.
- Myth: I can save money by paying myself as a contractor or lending myself money.
Reality: Paying employees as contractors to avoid entitlements is a misconception. The law considers personal services income, and improper classification may result in additional costs like superannuation and workcover. Lending money to yourself or others within the company should be done carefully, as failure to repay it within the same financial year might incur tax implications.
- Myth: My business can't save money.
Reality: Saving money is crucial for a healthy cash runway. By carefully managing expenses and making smart spending decisions, businesses can build a robust savings account to support their growth.
- Myth: The right financial model guarantees success.
Reality: While financial models provide valuable insights and aid in planning for expansion or investments, having a financial model alone does not guarantee success. The process of building the model, asking tough questions, and evaluating different scenarios is more critical than having a perfect plan.
- Myth: My Dad's accountant is good enough for my taxes.
Reality: Having an accountant with expertise in startups and fast-growing businesses is essential. The right accountant can provide insights beyond tax return preparation and help entrepreneurs make informed financial decisions.
- Myth: Good help is expensive.
Reality: The market for professional services like legal, accounting, and financial advice is competitive, and entrepreneurs should shop around for services that meet their needs and budget. Quality services may not always be expensive.
- Myth: Xero means I can do everything myself.
Reality: While Xero is a great accounting tool, spending too much time on bookkeeping and payroll can distract entrepreneurs from focusing on strategic growth. Outsourcing bookkeeping and payroll tasks allows business owners to concentrate on critical aspects of their business.
- Myth: My business isn't big enough for a CFO.
Reality: As businesses grow, they may benefit from the expertise of a Chief Financial Officer (CFO) or a virtual CFO. A part-time CFO can help with financial planning, fundraising, and overall business strategy without the commitment of a full-time hire.
- Myth: Raising capital from investors equals success.
Reality: While securing funding is a significant milestone, real success lies in using that capital strategically to increase the business's value and achieve both the founders' and investors' goals. Building an exceptional business is the primary strategy for attracting funding.
Being aware of these financial myths is crucial for startups and SMEs. By understanding the reality behind these myths and making informed financial decisions, entrepreneurs can set their businesses on the path to success and sustainable growth. Financial modeling is a valuable tool for businesses of all sizes, and it does not require extensive programming knowledge or formal qualifications.
When done right, financial models can be transparent, reliable, and adaptable assets that facilitate better decision-making. Embracing financial modeling can lead to more efficient operations, increased productivity, and reduced risks for your business. So, dispel the myths, explore the possibilities, and consider integrating financial modeling into your organization's practices. Also, to check out the Lifetime FREE access to Financial modeling course, you can visit keySkillset website.