Financial modelling helps Australian SMEs expand operations, secure funding, and make data-driven decisions while maximising the value of their resources. Achieving these goals requires choosing the most practical and effective financial strategies for your business needs.
Identifying the financial model that aligns with Australian regulations is also important. Not all models are universal, serving the same intent or use case. While some are straightforward, others require deeper expertise to understand your business’s financial health and stability.
In this blog, we will explore how to use various financial models to drive growth, enhance stability, and address challenges unique to Australian SMEs. From budgeting to valuation, learn how to align these models with your goals and operations for lasting business success.
Why Australian SMEs Must Prioritise Financial Modeling?
Financial modeling is valuable to each Australian SME as it intends to find the most optimised approach to cash flow breakdown. Here’s how:
- Regulatory Compliance: Remember that BAS lodgements and GST reportings are crucial to keeping your business legitimate. For example, a manufacturing SME can use a Project Finance Model to create carbon tax policies, ensuring compliance.
- Access to Funding: Using a strong financial model, you can learn to know your finances well, helping you attract investors and secure funding or loans. For example, a Series A funding for a tech company can be achieved using a Startup Financial Model.
- Competitive Edge: You can analyse market trends and operational efficiencies to stay ahead of competitors. For example, A retail SME uses a Forecasting & Budgeting Model to optimise inventory during peak seasonal demand.
- Weathering Economic Fluctuations: You can also plan for uncertainties and stimulate scenarios to evaluate the impact of an economic downshift period. For example, an agricultural SME can model the financial impact of droughts with a Scenario Analysis Model.
7 Types of Financial Models for Stability & Growth
Financial models are versatile techniques that serve specific purposes. You can ensure long-term economic sustainability by aligning the right model with your business goals.
1. Analysing Procurement Opportunities
A solid financial plan ensures reliable cash flow. It builds trust with stakeholders and investors while helping you evaluate the “what-if” scenarios and respond to factors like inflation, economic downturns, the opportunity cost of capital, risk, etc.
Model: Discount Cash Flow (DCF) Model
DCF model allows you to arrive at a discounted value of your estimated future money to the present value. It gives you an intrinsic value of your business, assets, and investments. Investors rely on this model to assess whether an investment opportunity is worthwhile based on its future returns.
Use case: Suppose a manufacturing company plans to expand its operations in the sector. Using a DCF model, they can evaluate the profitability of purchasing a new production facility. Here’s what to do:
Step 1 – Project Future Cash Flows: Estimate the expected revenue or savings the investment opportunity will generate over a specific time period.
Step 2 – Determine the Discount Rate: Use your cost of capital or expected return rate to discount future cash flows.
Step 3 – Calculate Present Value: Apply the discount rate to future cash flows to bring them to today’s value.
Step 4 – Evaluate Investment: Compare the total present value of cash flows to the initial investment cost.
The Discounted Cash Flow (DCF) model uses the following formula to calculate the present value of your future cash flows.
- DCF/PV: The total present value of all future cash flows.
- CF(t) Cash flow in year t.
- r: Discount rate (cost of capital or required rate of return).
- t: Time period (year number, e.g., Year 1, Year 2).
Example: If an SME expects cash flows of $10,000 in Year 1 and $12,000 in Year 2 with a discount rate of 8%:
- Year 1: 10,000(1+0.08)1=9,259\frac{10,000}{(1 + 0.08)^1} = 9,259(1+0.08)110,000=9,259
- Year 2: 12,000(1+0.08)2=10,286\frac{12,000}{(1 + 0.08)^2} = 10,286(1+0.08)212,000=10,286
- Total DCF or Present Value(PV): 9,259+10,286=19,545.
The project is worth pursuing if the initial procurement value is less than $19,545.
2. Day-to-Day Financial Management
A well-structured financial model clearly understands your business’s financial health and ensures smoother daily operations. It combines key financial statements to give a comprehensive view of your performance, helping you make informed decisions.
Model: Three-way Financial Model
The Three-way financial Model links the income statement, balance sheet, and cash flow statement, offering a complete picture of your financial performance. By understanding the relationship between profits, assets, liabilities, and cash flow, businesses can better track progress and plan for growth.
Use Case: Suppose you are an analyst creating a financial forecast for your business. The Three-Statement Model can help you in these steps:
Step 1 – Build the Income Statement: Forecast revenues and business operations expenses to estimate net income. (Net Income=Revenue−Expenses)
Step 2 – Combine with the Balance Sheet: Link the net income to retained earnings while projecting assets, liabilities, and equity. (Assets=Liabilities+Equity)
Step 3 – Interconnect the Cash Flow Statement: Use changes in the balance sheet to determine cash inflows and outflows, ensuring your business has sufficient liquidity. (Cash Flow=Operating Activities+Investing Activities+Financing Activities)
Step 4 – Analyse and Adjust: Use the interconnected model to track financial performance and adjust for growth or operational changes.
Example: Now, if you launch the product and it increases inventory by $5,000, you will see a short-run cash flow reduction. However, projected sales may generate $10,000 in revenue, improving long-term profitability and cash reserves.
3. Ensuring Reliable Funding Sources
Early-stage SMEs require finance resources and trusted stakeholders. For this, a startup financial model can be the optimal choice. It helps you estimate funding requirements and determine break-even points.
Now, let’s talk about the model and how a startup business can generate enough funds before it reaches the profitability stage.
Model: Startup Financial Model
- Estimate Funding Requirements: you can project revenues, expenses, and cash flows to identify the capital needed to sustain operations until they become self-sufficient.
- Determine Break-Even Points: It calculates the point at which total revenues equal total costs, indicating when the business will start generating profit.
Use Case: Pitching to Investors and Managing Cash Burn Rates
- Investor Presentations: A well-structured financial model demonstrates a startup’s understanding of its financial trajectory, instilling confidence in potential investors about the business’s viability.
- Cash Burn Management: When you monitor cash burn rates—the speed at which startups deplete cash reserves—you must ensure that the money is a sufficient runway to reach profitability goals.
Example: Consider an Australian tech startup developing a new software product.
- Funding Estimation: The startup uses a financial model to project development costs, marketing expenses, and operational overheads, determining it needs $500,000 to sustain operations for the next 18 months.
- Break-Even Analysis: The model calculates that achieving 1,000 active users will cover all costs by forecasting sales and subscription rates, with each user contributing a net margin after variable expenses.
The startup market is vast, with numerous enterprises increasing the funding race. A Startup Financial Model is indispensable for Australian SMEs aiming to secure reliable funding and achieve financial stability.
4. Comprehensive Finance Planning
Futuristic planning of your finances is among the utmost operational requirements because it helps you manage economic downshifts or when the business cannot generate new leads. It helps you allocate resources and assets in a way that your business overcomes any instability.
Model: Forecasting & Budgeting Model
Forecasting and budgeting models allow you to predict revenue, expenses, and money inflows/outflows over specific financial periods. Businesses can build a strategic financial roadmap using these models to allocate resources and meet operational requirements.
The core fundamentals of budgeting are—adjusting, tracking, and evaluating:
- Adjusting: Adapt to market changes such as fluctuating demand or unexpected expenses using flexible budgeting.
- Tracking: Consistently monitor financial performance against the budget.
- Evaluating: Reviewing financial outcomes helps identify gaps and make informed decisions for future planning.
Australian SMEs can use a forecasting model to predict market trends, results, or events based on historical finance data and assumptions. This strategy helps Identify gaps between actual or forecasted results and budgeted figures, uncovering discrepancies like revenue shortfalls or cost overruns.
Use these insights to assess performance, highlight strengths, address weaknesses, and make strategic adjustments. Let’s check out the formula for revenue forecasting and budget variance analysis:
Revenue= Units Sold × Selling Price per Unit
Budget Variance= Actual Amount − Budgeted Amount
Use Case: A retail SME might forecast seasonal sales during the holiday season, allowing it to plan inventory purchases, staffing, and marketing spending efficiently. Using a forecasting model, an Australian hospital SME can predict the increased pharmaceutical demand during summer.
By aligning its budget to hire seasonal staff and invest in marketing campaigns, it achieved a 20% revenue increase compared to the previous year.
5. Projecting Risks and Contingency Planning
SMEs can prepare themselves for uncertainties in large projects. Scenario analysis and project finance models help evaluate risks and plan effectively for success.
Model: Scenario Analysis & Project Finance Model
Scenario analysis and project finance models are designed to evaluate the financial feasibility of large-scale projects. This includes operations such as infrastructure development or business expansion.
It’s more like a risk analysis that you can do before you put your hands in the larger pool of market expansion. Using these models, you can simulate various scenarios—best-case, worst-case, and most likely outcomes—helping you prepare for uncertainties.
Key metrics include:
- Internal Rate of Return (IRR): Measures the expected rate of return on a project.
- Net Present Value (NPV): Calculates the current value of future cash flows, helping determine a project’s profitability.
The IRR is the discount rate (r) that makes NPV = 0:
and;
- Cash Flow(t): Cash inflow during the period “t”.
- r: Discount rate.
- t: Time period.
Use Case: For SMEs, projecting risks and planning contingencies is crucial for long-term stability. For example, an agricultural SME can use scenario analysis to prepare for climate-related risks, such as droughts, by diversifying revenue streams or investing in water-saving technologies.
Example: An Australian construction SME plans to develop a new office building. Using project finance models, it calculates an NPV of AUD 500,000 and an IRR of 15%, confirming the project’s feasibility. Scenario analysis further evaluates potential delays due to supply chain disruptions, enabling the SME to include contingency costs in the budget.
6. Evaluating Growth Through Expansion
Acquiring another business can be a growth catalyst for you, but leveraging a buyout model helps assess the feasibility of such debt-financed acquisitions.
Model: Leverage Buyout (LBO) Model
An LBO model helps SMEs evaluate the feasibility of acquiring another business using borrowed funds. The model considers factors like cash flow sustainability, debt repayment capacity, and the target company’s growth potential.
Understanding the financial risks and benefits of acquisitions helps you make informed decisions to expand your operations. The formula for the debt coverage ratio determines if the acquired business’s cash flow can cover its debt obligations.
Use Case: LBO models are especially useful for SMEs looking to grow through strategic acquisitions. These models ensure businesses assess the long-term impact of debt-financed growth on profitability.
Example: An Australian healthcare SME identifies a smaller clinic for acquisition. Using an LBO model, it calculates post-acquisition cash flows, confirming that the clinic’s revenue will cover loan repayments within three years. This acquisition increases the SME’s market share and strengthens its competitive position.
7. Forecasting Business Valuation
Accurate valuation of a business is essential for fundraising or selling. Valuation models provide insights into a company’s worth and growth potential.
Model: Valuation Model
A valuation model estimates the value of a business or asset, making them critical for SMEs involved in fundraising, selling, or internal analysis. It incorporates various approaches to determine a business’s worth, including discounted cash flow (DCF), comparable company analysis, and precedent transactions.
- Where:
- Free Cash Flow(t): Expected cash flows.
- r: Discount rate (usually Weighted Average Cost of Capital – WACC).
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Multiple:
Business Valuation=EBITDA×Industry Multiple
Use: A quick estimate of a company’s value based on comparable businesses in the industry.
Use Case: A well-prepared valuation reflects the current financial position and highlights the growth potential. This makes the business more authentic and valuable for interested stakeholders.
Example: An Australian tech startup preparing for Series A funding uses a valuation model to estimate its worth at AUD 2 million. The model includes projected revenue growth, demonstrating the company’s potential to scale. This transparent valuation convinces investors, helping the startup secure AUD 500,000 in funding.
From Funding to Expansion: How Australian SMEs Can Benefit from Financial Modeling?
Cash flow challenges remain a major concern for 40% of Australian SMEs, particularly in construction, retail, transport, and property services. While financial modelling is often associated with large corporations, it is equally vital for small and medium-sized businesses.
Using customized financial models, you can improve decision-making, maintain compliance with Australian regulations, and strategically plan for sustainable growth. At Business Avengers, we are dedicated to empowering Australian SMEs with tailored financial modelling outsourcing services designed to meet their unique needs.
Contact us today for comprehensive finance modelling and other consultation services!
