How financial modelling will help you prepare for the medium to long term – Advice from Fora’s workshop with KPMG

May 2020

Current challenges have made financial modelling more important than ever. Such models help to provide greater certainty in uncertain times and link short and medium-term projections with the longer-term goals of the company.

For the latest in Fora’s series of workshops with KPMG, several experts in financial modelling and analytics, whose experience ranges from start-ups and IPOs through to complex organisations with multiple business units, explained how companies should be reviewing and adapting their projections as a result of Covid-19.

 

The benefits

There are several benefits to carrying out financial modelling. Such models help to develop a deep insight into the strategic options available to a business and provide the information to help leaders make better business decisions. By giving an accurate picture of business performance they are also crucial in fundraising, which many companies may be doing at present. A detailed financial model enhances credibility with investors and other stakeholders, too.

 

Getting it right

Putting together a financial model can be a complex task, and not simply in terms of the revenue and cost structures required, explained Deepa Ramchandani, Financial Modelling Manager at KPMG UK. A model needs to be easy to follow, understand and navigate. It needs to be consistent and to flow logically. Above all, it must be flexible, allowing for multiple input assumptions. “We’re not just modellers,” said Deepa. “We bring a lot of subject matter knowledge and commercial acumen to the table.”

 

Cash is king

– particularly now. Around 80% of small businesses fail within 5 years due to lack of cash, even in the good times. A good financial model can help to prevent that fate with detailed analysis of cashflow forecasts on a daily, weekly or monthly basis. “It can help you identify the business levers to pull – such as cost reductions – needed to meet corporate objectives,” said Deepa. The link between the short-term analytics of monthly cash positions and the organisation’s 5-10 year plan is clear to see.

As businesses renew control of their own fortunes in the face of unexpected and severe disruption, models are a vital part of their armoury. “Our models allow for KPIs – essential indicators to monitor the performance of the business, displayed in an intuitive and graphical way,” observed Deepa. By providing a clear view of risks, revenues and company valuation they also provide clarity in multiple fundraising scenarios.

 

The Covid effect

Brendon Stansfield, a leading expert with KPMG’s Accounting Advisory Services, consults with clients on technical accounting issues. “Covid has impacted practically every line on the balance sheet,” said Brendon. Tangible and intangible assets, leases, inventory – these are just some of the items whose accounting policies will need to be reviewed. Brendon continued, “Within each accounting framework there are a number of choices, estimates and judgements that have to be made for the Directors to conclude on the accounting policies for a company.” There are also new items such as the Government’s Job Retention Scheme that need to be considered.

The impact of Covid-19 has been so significant that there has been discussion within the industry of presenting financials on the basis of EBITDAC – Earnings before Interest, Tax, Depreciation, Amortisation and Covid. It is important for many businesses to show their financial position as a going concern and to demonstrate the Covid-adjusted cashflow generating capacity of the business. Experts such as KPMG can help businesses navigate these challenging times and, in recognition of these unique circumstances, Companies House is allowing firms to extend the due date for the submission of their accounts by a further three months.