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Creating value through financial modelling

Nov 22, 2012

There are several ways for businesses to get ahead, and having an intimate understanding of how key value and cost drivers affect business performance is one of those.

A financial model can deliver this for a business owner or management team, allowing them to explore the financial impact of strategic decisions, understand risk and value drivers and validate the company's business plan and investment decisions. A robust financial model provides a tool for driving performance and creating value from data.

Unlocking value

Cranleigh Director Andy Reid has vast experience building financial models and leads the Financial Modelling team. For Andy, a financial model can deliver real value for a client even if they aren't being developed for a specific transaction or project. There are several uses a business can get from a model. Valuing a business is an obvious one, but many more exist, such as operational models and value chain models that are designed to optimise business processes and performance.

Financial models can give visibility of the impact of capital raisings, acquisitions or other business changes, the performance of individual geographic areas or business units, provide sensitivity and scenario analysis, an understanding of business risks as well as offer easily digestible dashboards that give a snapshot of current and forecast business performance. A well designed financial model is an invaluable management support tool; providing a platform to identify where a business creates value and where a business is exposed to risk.

Waruna Karunaratne is a Manager at Cranleigh and knows well the power a model has to deliver insight. Understanding the influence that changes in variables or business conditions can have on your bottom line is crucial. If management know what happens to their profitability if their margins shrink by 5%, sales volumes drop by 10%, or the price of a key input goes up, they are in a stronger, more knowledgeable position.

The modelling process measure it twice, cut it once

Cranleigh recently developed an integrated financial model for Vix Technologies; an Australian based multinational company that specialises in creating payments and communications technology for the public transportation sector. According to Andy, the complexity in this model came from the companies diverse geographic spread and the ad-hoc nature of their revenues.

Vix required a model that gave them good oversight of the performance of their different geographic business units and an ability to determine and track KPI performance targets for these areas. At a more macro level, the ability to determine the impact on the business of any acquisitions or new projects, including different funding structures, was important to management.

A key part of delivering a model that would create real value for Vixs Technologies lay in the initial planning of the project. Working with our client to understand their business, its key drivers and crucially, what they want from the financial model is the first and most critical step to ensure that any model is developed to its fill potential says Andy. Measure it twice, cut it once is one of the guiding principles of financial modelling; sufficient time must be invested in understanding the business operations and requirements. Retrospectively updating a model to add additional features or structural elements that were not initially considered in the model plan can be quite challenging. As Andy notes, One of Cranleigh's key services is the review and audit of models developed by third parties. We find that retrospective changes in structure often results in inadvertent errors in a models mechanics.

Once Cranleigh had a robust understanding of Vix's business operations and had agreed the key objectives, an integrated financial model that united the key aspects of Vix's operations, finances and strategic planning was developed. This process is iterative, as the thinking of both the client and the modelling team does develop over time. Communication with Vix was an important aspect throughout this period, both to ensure their expectations were being met and their up-to-date thoughts were being incorporated. Another key aspect is the technical modelling itself. Cranleigh's mix of experience and youth within the modelling team ensures that robustness, best practice and innovate techniques are all incorporated together to provide the best possible model for the client, on time and on budget.

Vix is now taking ownership of the model themselves by updating the model with their latest financial data and forecasts. This is an important step in the integration of the model into the organisation; helping to ensure the business understands how the model works and how it can be best used to improve and enhance their performance.

In Andy's words, the real determination of the success of a model is how it is utilised. Integrating a financial model into the day-today operations of the business can be difficult, but that is where real value can be created. Delivering the client a model that they can take ownership of is a key focus when Cranleigh undertakes this type of work.

If you think financial modelling can assist you in your business, please contact:

Andy Reid, Director, 09 353 0774

Waruna Karunaratne, Manager, 09 353 2052

Matthew Willacy, Senior Analyst, 09 353 2055


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