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What does a small business financial model do?
A small business financial model is a spreadsheet that shows what your plans will do to profit, cash and what you owe. You put in how the business runs (customers, prices, wages, rent, stock and loans) and it shows, month by month, whether the bank balance goes up or down.
Picture a café serving 300 customers a day at an average of $14. That is $4,200 a day, or about $1.3m a year over 310 trading days. With coffee and food at 30% of sales, wages at 35% and rent at 10%, about a quarter is left to cover the loan, the owner and everything else. Now add a second site: the model shows the fit-out cash going out up front, the new site’s sales building over its first months, and the month the combined bank balance is lowest.
Your accountant’s reports look back at last year. A model looks forward, and answers the questions that keep owners up at night:
- Can we afford the loan repayments?
- Should we open a second site, and how long until it pays for itself?
- Can we take on another person, and how much more do we need to sell to cover them?
- What happens if we put our prices up 5%?
- When in the year is cash tightest?
What goes into a business financial model?
Three reports, linked so that one change flows through all of them. The profit and loss asks: did we make money? The cash flow asks: can we pay the bills? The balance sheet asks: what do we own and owe, and is the business getting stronger?
Underneath sit the drivers. For a café: customers a day × average spend, coffee and food costs as a share of sales, wages from the roster, rent and the loan. For an electrician: jobs a week × average job value, materials, vans and apprentices. Everything you might want to change sits on one inputs sheet, in blue.
Two things catch owners out. Profit is not cash: you can be profitable and still run short when customers pay late, stock piles up or GST falls due at the end of the quarter. And seasons matter: a café’s winter or a builder’s January can eat a good month’s cash.
So read the model from the cash flow up. The lowest closing bank balance in the year is the number to watch, and the month it falls in tells you when to have a buffer or an overdraft ready.
What does a bank want to see before a loan?
Ask for a business loan and the bank wants three answers: how much you need and what it pays for, whether your cash flow covers the repayments, and what happens if trading dips.
Be specific about the money. “$180k for the fit-out and equipment of a second café, repaid over five years” tells a lender far more than “working capital”. Then expect to show:
- Cash flow projections, usually monthly for at least the first year.
- The assumptions behind them, written down: sales growth, how quickly customers pay, supplier terms, seasonal swings and equipment spending.
- Interest cover and debt service cover: how many times your earnings cover the interest, and your cash covers interest plus repayments. Each lender sets its own minimum.
- Two or three years of past results, so the forecast starts from something real.
- A slower case that still pays the bank.
Which mistakes sink small business forecasts?
Most forecasts owners build themselves go wrong in the same few places. Watch for these:
- Last year plus 10%. Build sales from customers, visits or jobs instead, so you can see what has to happen.
- No wage for the owner. If you work in the business, pay yourself in the model, or the profit is flattering you.
- Leaving out GST and loan principal. Neither is an expense, but both leave your bank account.
- Only one version of the future. Add a slow case: what if sales run 15% lower for six months?
- Annual numbers only. Cash problems happen inside the year, and only a monthly model shows them.
Can someone build the model for me, free?
You do not need to know Excel formulas or finance jargon. Tell us about the business in a few sentences, in your own words, and attach what you have: the profit and loss and balance sheet you export from Xero, MYOB or QuickBooks, a budget, a lease, a quote for new equipment.
We build a three-statement model around your business from tested building blocks, with monthly cash, loan repayments, scenarios for your good and bad cases, GST settled monthly or quarterly where you need it, and a Checks sheet that proves it balances. A How it works sheet explains every part.
Our team reviews every model before it is sent, and it is usually ready within the hour. Building it and previewing every sheet online are free. In Excel, every formula stays intact, so your accountant or broker can check the workings.