Why Your Approach to Financial Modeling Matters in the Bank Business Plan

1. Why Your Approach to Financial Modeling Matters in the Bank Business Plan When creating your Bank Business Plan, every section and aspect of your plan matters. It all needs to tie together to create one cohesive and convincing representation of your business. However, potential lenders are more interested in some sections than others. One of the sections that will matter most is your financials. You will (or should) use financial modeling to arrive at your financial projections. How you approach your financial modeling will determine how your bank business plan is perceived by the loan officer or other bank officials. What is Financial Modeling? Understanding how Financial Modeling will impact your bank business plan begins with understanding financial models. According to Corporate Finance Institute, “A financial model is the summary of a company’s performance, based on certain variables, that helps the business forecast future financial performance. In other words, it helps a company see the likely financial results of a decision in quantitative terms. The measurements and skills used to construct the model include knowledge of the company’s operations, accounting, corporate finance, and Excel spreadsheets.” To summarize this definition, financial modeling is the process of plugging in variables to a spreadsheet to see how it will impact financial outcomes or, in the case of the bank business plan, financial projections.

2. Financial Modeling Approach Since financial modeling is based on variables that you plug in, your approach comes down to how you determine what variables to use. If your business has already been in existence, you will rely on actual financial results. The more actual financial history you have, the more reliable – and provable – the assumptions (aka variables). A couple months of financials is not enough to justify assumptions. They should also be supported with Market Research and other types of research such as getting price quotes for certain supplies or services you will need to run your business. Further, when it comes to your financial modeling, you need to be able to show your work to an extent. It’s not enough to show the final financial projections, you must explain how you arrived at them. Think back to math class, you couldn’t simply write down the answer, you had to show your work. In the bank business plan, you show your work in an appendix. Financial modeling often results in lengthy, complicated spreadsheets which are not suitable to be printed. In most cases, you won’t show the entire model but, rather explain how you chose the key assumptions or variables that fed the model. Here’s an example: You estimate payroll costs for the first year at $250,000. In your Financial Modeling work, you will have arrived at that by taking into account your hiring plan. You’ll have listed each position and it’s expected salary for the year. Then, you will research average benefit costs. This may be a simple % based on industry standards or, if you have already started pricing out health plans, retirement plans, etc. it will be based on real figures. You want to use whatever figures most accurately reflect reality, the more accurate and “real” the numbers and assumptions, the better. In a bank Business Plan, your financial projections, and therefor financial modeling, will likely be scrutinized more closely than in any other type of business plan. Why? Because a loan officer’s main concern is whether or not you can repay the loan. They need to know you have a realistic expectation for revenue and expenses and have a solid cash flow management plan. Sound financial modeling and financial projections is the best way to demonstrate this.