Iíll happily throw my hand up and admit that my financial modeling is not what it aught to be. But I
have been learning quite recently from a guy at work who used to be in the Venture Capital industry about just what makes a great, initial, financial model. Yes, I hear you say, World Vision has a Venture Capitalist on itís books?! Weíre innovating, baby! (Well, weíre on the way. Weíre not there yet - more in future posts).
Anyways, David describes the ability to create a good financial model is not how well you structure your excel spreadsheet. Itís not even how well your P&L matches your Cash Flow which matches your Balance Sheet. In fact, he says, you donít need any of that in the first instance.Itís how well you can play Jenga.
The type of analysis he talks about needs to be done on the back of a napkin, in ten minutes, and then show what the key factors are for success. There are going to be some things in the business which are not so important, and some that are crucial. The ability to show investors (and internal stakeholders that control budgets) a quick sensitivity analysis, which highlights the key factors of an opportunity, is amazingly powerful and useful.
Some things in your business are not going to be as important as others. Just like a game of Jenga, a good entrepreneur will highlight to investors which blocks not to pull out, and which ones can be moved. Whatís the value of this? Immense. How many can do it? Apparently, not many at all. The question now is, how to practice such a skill?
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