Financial modeling is not just the responsibility of the finance team. It is important to involve cross-functional teams such as marketing, sales and operations along with your finance team from the beginning of the process. Without proper collaboration and input, important factors in your new product financial model may be overlooked, potentially leading to inaccurate or incomplete financial projections.
Incorporate Stakeholders Early in the Process
On a past project, I was tasked with analyzing and modeling out new strategic revenue opportunities. In my case, I gathered a cross-functional team with finance, sales, marketing, operations and product development representatives, and we spent a day working through a series of different exercises and frameworks to help us choose the right service offerings.
Incorporating the key stakeholders early in the modeling process creates buy-in and will help to identify problems early, create a collaborative environment, foster accuracy and build support for the final model. You can further increase your chances of success by:
Clearly Define Roles and Responsibilities
When working with a cross-functional team, it’s important to ensure that each member understands their role and responsibilities in the financial modeling process. This includes identifying the key stakeholders, decision makers and subject matter experts who will be involved in the project. By clearly defining roles and responsibilities, each team member can focus on their specific contributions and avoid duplicating efforts.
Establish Communication Channels
Effective communication is essential when working with a cross-functional team. Establishing clear and open communication channels can help ensure that everyone is on the same page and that important information is shared in a timely manner. This includes regular meetings, email updates and shared project management tools that allow for real-time collaboration and feedback.
Emphasize the Importance of Data Accuracy
Financial modeling relies heavily on data accuracy, and it’s essential that the entire team understands this reliance. Establishing data standards and ensuring that data is verified for accuracy can help avoid errors and mistakes down the line. This includes conducting regular data audits and testing assumptions to ensure that data is reliable.
When working with a cross-functional team, it’s important to foster a collaborative environment where everyone feels comfortable sharing ideas and contributing to the project. This can be achieved by establishing a culture of respect and inclusivity, encouraging teamwork and sharing successes together.
Understand the Business Opportunity
Once you have the right team, the next step is making sure your new product financial model is both functional and accurately models the potential opportunity. Understanding the business opportunity will involve researching the industry, market and target audience. You should also have a clear understanding of the product or service being offered, and the key features and benefits that differentiate it from competitors. This understanding will help you to identify the key assumptions that are required for the financial model.
Overall, a thorough analysis of the market and competition is crucial to identifying both challenges and opportunities that can impact the success of a new business venture within an existing company. In this analysis, you should:
- Identify the problem or need that the opportunity aims to address.
- Conduct a SWOT analysis to assess strengths, weaknesses, opportunities and threats associated with the opportunity.
- Define the target market and potential customers.
- Evaluate the competition and market saturation.
- Assess the potential impact on the organization’s resources, including finances, personnel, and infrastructure.
- Consider the feasibility of implementation, including technological, legal and logistical factors.
- Determine the potential return on investment and long-term growth potential.
- Gather input from each member of the cross-functional team to ensure a comprehensive evaluation accounting for various perspectives and expertise.
Remember to prioritize opportunities based on their potential impact, feasibility and alignment with the organization’s mission and goals. Using common tools like SWOT Analysis, Porter’s 5 Forces, and outlining your Value Chain can be useful frameworks for aligning a team on what key factors to consider.
In our project, we made sure to research the market landscape and competition for each of our new potential service offerings using Porter’s 5 Forces and STEEPLE Analysis to make sure we understood the external market. Then we went through a Force Field Analysis and Porter’s Value Chain to really outline and clarify our internal strengths and weaknesses. This helped us build a clear SWOT Analysis for our company. Looking again at our potential options through the lens of the SWOT Analysis highlighted some aspects that we might have overlooked. For example, going through this process helped us identify which potential revenue opportunities were in demand with our existing customers and helped us focus on services that leveraged our current employees’ existing skill sets and that we had the bandwidth to execute.
We then took these opportunities and made sure they aligned with our long-term vision and goals. With this in place, we mapped the opportunities onto an impact/effort matrix to clearly show which new service offering should be our top priority. The impact/effort matrix identified what we felt was both important and executable for the team. Working through this process together caused alignment and clarity on why and how we wanted to approach the new venture.
Identify Your Assumptions
Before you start modeling, you need to identify your key assumptions. This involves looking at the market, the competition, the target audience and other factors that can potentially impact your business. Clearly outlining your assumptions can help you avoid some of these common mistakes when modeling opportunities:
- Underestimating Competition: Failing to recognize potential competition can result in unexpected challenges and decreased revenue.
- Neglecting Operational and Logistical Constraints: Understanding potential limitations and constraints is essential to ensure the venture is sustainable in the long run.
- Ignoring Legal and Regulatory Requirements: Failure to comply with legal and regulatory requirements can lead to legal consequences and financial losses.
- Not Accounting for Financial Resources: Insufficient funding can prevent the venture from achieving its full potential.
- Undervaluing Human Resources: Neglecting the importance of skilled and dedicated employees can hinder the venture’s success.
- Failing to Adapt to Changing Market Conditions: Markets are dynamic and constantly evolving, and it’s important to be adaptable and flexible.
- Overlooking Potential Risks and Threats: Proper risk assessment is necessary to anticipate and mitigate potential threats to the venture.
- Not Considering the Impact on the Existing Business: Introducing a new venture can have unintended consequences for the existing business, and it’s important to consider how it will affect overall operations.
With our team in place, we gathered assumptions to build out the financial model. We made sure to design the financial model to incorporate various scenarios including low, base and high revenue targets to help us understand our risks and potential rewards. The cross-functional team was integral in each stage of this process to make sure that their ideas and assumptions were incorporated into the model. Having the different departments as part of the team really helped refine assumptions, which allowed us to model expenses more clearly in each scenario instead of having the typical % of sales estimates. Assumptions built from collaboration and a mutual understanding of the basis of each scenario helped the final model have support across the major departments for approval.
Create a Flexible Model
When modeling new business opportunities, it’s important to use a flexible model that can be adjusted easily. A flexible model also helps you to identify the key variables that are driving your business, and it allows you to test different scenarios and see how they impact your business. For example, what would happen if your sales were lower than expected? What if your costs were higher than expected?
Once you’ve built out your financial model and gotten approval from management, make sure your hard work isn’t wasted by creating a clear strategy for implementation and execution.
Create an Evaluation and Review Process With Potential Contingency Strategies
Failure to adjust the model based on changing business conditions can effectively waste all the hard work that your team did in developing the financial model. It is important to regularly revisit and update the financial model, taking into account any new information or changes in the market or industry.
To develop strategies for adjusting financial models based on changing market conditions, there are a few key steps to follow:
- First, it’s crucial to regularly monitor and analyze market trends and data to identify changes that may impact the financial model. This could include shifts in consumer behavior, changes in the competitive landscape, or broader economic factors such as interest rate fluctuations.
- Once potential changes have been identified, it’s important to evaluate their potential impact on the financial model. This could involve revisiting key assumptions and inputs, such as revenue projections or cost structures, to ensure they remain realistic and accurate.
- Develop scenarios. Once the potential risks have been identified, it is important to develop different scenarios for how these risks could play out. This will help in creating a plan for how to manage each scenario.
- Based on the scenarios, create a contingency plan that outlines the steps to take if each scenario arises. This plan should include specific actions and responsibilities for each member of the cross-functional team.
It’s also important to regularly review and update the financial model to reflect ongoing market changes, rather than relying on a static model that may quickly become outdated. By staying vigilant and adaptable, cross-functional teams can build robust financial models that can withstand the volatility of today’s business landscape.
Once approved, the team was brought together again to lay out a strategic deployment plan for execution. The deployment of our initiative was tracked using detailed action plans with clear deadlines and KPIs to track progress with each department being responsible for the KPIs that matched the assumptions incorporated in the finance model. The plan included a contingency plan if we weren’t hitting our goals, so we knew when to pivot or reassess our offering. The deployment was incorporated into the monthly review process with any changes updated into the financial model to keep it relevant.
If you’d like to learn more about collaboration across teams, consider downloading our cross-functional project management infographic. If you’d like to learn more about modeling best practices, our free guide to subscription-based financial models is a great resource too: