Why Financial Modeling is Essential for Project Financing

Financial modeling assists decision-makers in making educated decisions based on data analyses that propel their businesses ahead. Key information about a company’s financial levels and risks are extracted via financial modeling. This knowledge assists stakeholders in making healthier decisions. In this article, Green Urbane explains how financial modeling is crucial for project finance.

Before We Dig Deeper Into The Importance Of Financial Modelling, Let Us First Understand What Financial Modelling Is:

A financial model is essentially a tool embedded into spreadsheet software like Microsoft Excel and Google Sheets that forecast a company’s financial performance in the future. The prediction is often based on the company’s past performance and future expectations, and it necessitates the preparation of an income statement, balance sheet, cash flow statement, and supporting schedules. More complex models, such as discounted cash flow analysis (DCF model), leveraged buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis, can be created from there.

A financial model’s output is utilized for decision-making and financial analysis, both within and outside of the organization. Executives inside a firm will use financial models to make choices regarding raising cash (debt and/or equity). Making purchases (of companies and/or assets), Organically expanding the business (e.g., opening new stores, entering new markets, etc.), Analysis of financial statements/ratio analysis Accounting for management, selling, or diverting business elsewhere.

Hiring a project financing company in the UAE such as Green Urbane allows companies to have a data-backed financial model. This further helps them in growing their business and growing their sales.

Let Us Now See How Financial Modeling Helps in Project Finance:

• Improved Understanding of Your Business

Unlike other modes of raising finance, project finance is high-risk finance for financial institutions. Bankers have special teams that analyze and scrutinize project finance proposals before them. Having financial modeling ready means you can present it before financial institutions. When your bankers or financial institutions have easy access to your financial modeling, they can have a better understanding of your business. This helps them make a confident decision on financing your project. In a way, financial modeling is one of the main reports and documents that help their project get funded. That is why companies should get their financial modeling done with the help of a public sector consulting firm.

• Business valuation

Another key factor that helps bankers and financial institutes decide to fund your project is your business’s valuation. In layman’s terms, business valuation is similar to the net worth of an individual. But unlike individual net worth, a new project’s valuation is a bit tricky and has technical requirements. A financial model helps understand the expected cash flows a project may have at specific intervals. Hence, cash flows help calculate the profitability of a project, and hence it helps your project get funded easily. Getting your financial models ready from a public service consulting firm helps increase your chances of getting funded.

• Financial Modeling Helps Businesses Review Their Performance Periodically

Periodic review is important even for a new project. Whenever any company or organization initiates a new project and approaches a financial institute for project financing, financiers always like to see their past performance and income. That’s why companies should not only focus on building their new projects’ financial modeling but also on their current projects’ modeling. Apart from the financiers’ point of view, financial modeling and its review help organizations check their performance and make necessary changes for development and growth. Without periodic reviews, businesses wouldn’t know which direction they are going towards; it would be like walking in an endless dark tunnel. When you hire a PPP and project finance firm in the UAE, the advisory firm assists you at appropriate intervals to take the right decisions and prepare the right reports.

• Helps Financers Decide The Fund Requirement For Your Project

What most financial institutions do first, when they receive a project finance proposal, is assess the requirement for funds for your project. Whether funds are required or not, the review team of financial institutions thoroughly examines it. Financial modeling gives bankers clarity about the financial factors of your project. It gives a clear idea to your banker about the required net cash flows for daily operations. Financial modeling even gives a clear insight into the cash flows of a project after it pays the interest payments and repayment of loans. This helps bankers decide to what extent your project can be successful and if it’s feasible for them to fund it. When public-private partnership companies hire project finance advisory firms in Dubai for their financial modeling, they get better models prepared for their business and it increases the chances of their successful project funding.

• It Helps Generate Quick Output

Businesses can take months to decide about important financial questions they may face. Getting quick answers to such questions helps businesses make faster and more informed decisions for their day-to-day operations. The saved time and faster results become extremely useful to businesses. That is why, in a way, financial modeling is not only important for project finance but is also important for making daily decisions for a business. PPP consulting services not only help businesses initially but throughout the life cycle of a project.

• Financial Models Help Businesses Make Accurate Budgets

Financial models build budgets based on past, previous, and future data of a business. Being heavily relied upon and backed by data budgets derived using financial modeling tend to be very accurate as compared to non-data-backed budgets. Planning and preparing data-backed budgets helps businesses propel towards their goals in a streamlined manner. By not making any business strategy or forming goals and budgets a business puts itself at immense risk.

Concluding Lines

Having clear financial modeling prepared by a reputed public service consulting firm allows businesses to accurately budget their operations, prepare business strategies, decide on their valuation, and similarly helps in various other factors. The key reason financial modeling helps a business is getting project funding done.