Financial modeling services are used by small businesses to make important decisions relating to growth. There are a number of different types of services that are useful, but the underlying goal is usually the same – to lower the risks involved with growth.
Financial modeling services are designed to help a business assist in creating models that are essential to raising capital and assessing new opportunities in business. One of the biggest challenges when seizing new opportunities is risk assessment. Modeling ultimately helps lower that risk.
The two biggest problems that small businesses face from a financial perspective are debt management and debt levels. Debt in general can greatly reduce profit margins. So, we’re going to shed some light on how financial modeling services can help lower this unique type of risk and move your business to new heights.
Know Your Debt-to-Capital Ratio
The debt-to-capital ratio provides a visual look at a business’ overall financial situation. In short, we look at how a business capitalizes on its current operations. Its primary purpose is to provide a comparison of its debt obligations, both short-term and long-term debt. Naturally, you want a low debt-to-capital ratio.
Having access to this ratio helps you determine whether growth is a valid option. For example, expanding your business while having a high ratio would be a higher risk scenario since you will likely have to increase it even further.
Financial modeling services help you find the best sources of capital for your business, helping you better manage your debt-to-capital ratio.
Understand Interest Coverage
The interest coverage ratio provides a quick look at how a business handles its short-term financing. In short, this ratio shows you how many times your business can make its required interest payments based on its current earnings. Lower interest coverage means that a business is at greater risk of financial issues, so growth under such circumstances would be risky.
Use financial modeling services to pinpoint the underlying problem. As a rule of thumb, an interest coverage ratio that’s lower than 1.5 is bad. If your ratio is too high, it means that you are failing to take advantage of your available leverage. This is a sure sign that it’s time to focus on growth.
Avoid Flawed Financial Models
Small businesses that try to create financial models in-house run the risk of creating a flawed model, which is a potentially dangerous mistake. The most obvious flaw would be a business that creates their model based on spending more to gain new customers than those same customers are willing to spend. This might seem strange, but for some reason it happens quite often in small businesses.
Using financial modeling services provides a way to avoid the risk of flawed models altogether. By designing a model that works for both yourself and your customers, you’ll find success much easier to achieve.
Other Common Risks That Small Businesses Tend to Ignore
Finally, there are a number of smaller risk factors that are ignored by so many small businesses. Again, some of these seem so obvious that the fact they are ignored is mind-boggling.
- Keep up with the latest changes to your target market by analysing the impact of newer developments within your industry.
- All new business ventures must have the right type of financial backing. Financial modeling services should be used to find opportunities that put the least amount of debt burden on your business.
- Use modeling to provide an accurate business valuation analysis. Trying to grow your small business without knowing its current value is risky. Lower that risk.
Financial modeling services should be used as a tool to help support your decisions. In combination with other forms of business intelligence, they serve as an outstanding risk management solution.