Introduction
Organizations can leverage a 3 Way Financial Model to make financial decisions. The model is based on the premise of aligning a financial plan with an operational plan and a strategy plan. This type of model enables organizations to measure actual performance against the budget, identify potential operational and financial issues, and revise their business and financial plans as needed.
Definition of 3 Way Financial Model
The 3 Way Financial Model is a strategy to measure the financial performance of an organization and its individual departments or projects. It consists of three components: a financial plan, an operational plan, and a strategic plan. The financial plan includes the budget, the income statement, the balance sheet, and the cash flow. The operational plan includes the activities and metrics used to measure progress. The strategic plan includes the long-term goals and objectives of the organization.
Benefits of 3 Way Model
- The 3 Way Model offers more accurate forecasting by taking into account multiple scenarios.
- It enables organizations to make better decisions based on cost, profitability, and pricing.
- The model helps organizations to set and measure goals in terms of financial, operational and strategy goals.
- It offers an analytical approach to decision making, allowing organizations to examine financial performance at a deeper level.
- It allows for more transparency and accountability in financial reporting.
Key Takeaways
- The 3 Way Financial Model enables organizations to measure actual performance against the budget and revise their business and financial plans as needed.
- The model offers more accurate forecasting by taking into account multiple scenarios.
- It helps organizations to set and measure goals in terms of financial, operational and strategy goals.
- It allows for more transparency and accountability in financial reporting.
Pros of 3 Way Financial Model
Adopting the 3 way financial model offers a range of benefits for businesses, particularly with regards to efficiency, forecasting, and overall financial performance. Let’s take a closer look at these advantages.
Increased Efficiency
The 3 way financial model offers a ‘planned’ approach to budgeting, which can have a surprisingly positive impact on overall efficiency. This approach requires businesses to carefully predict and plan for their outgoings according to cash flow and revenue streams. Having a clearer understanding of financial working helps organizations become savvier with their resources and make smarter decisions—reducing waste and unnecessary expenditure.
Improved Forecasting
The 3 way financial model also is an effective tool for forecasting revenue, ensuring businesses have a better understanding of future revenue streams. This allows organizations to easily predict cash flow and budget for the coming months—providing the security of knowing when and how much money will be available.
Greater Financial Performance
By improving performance through efficient budgeting and better forecasting, it’s easy to see how the 3 way financial model increases overall financial performance. Businesses can set realistic goals that are tailored to their resources, working towards achievable targets.
Organizations that successfully adopt the 3 way financial model are well equipped to achieve their financial objectives, whatever they may be.
The Cons of Adopting a 3 Way Financial Model
Limited Budget Flexibility
The 3 Way Financial Model involves dividing one budget into three distinct areas: income, savings and expenses. This important classification can result in an increased level of visibility, but it can also limit budget flexibility. Once these budgets are created, it can be difficult to transfer money from one budget to another, as any additional income must be evenly distributed between these three budgets.
Long Setup Time
Creating a 3 Way Financial Model can take a considerable amount of time. For some, the process may involve hiring a professional financial planner or accountant to properly set the model up. Others may have the skills to create a model on their own, but such a process can still take weeks or even months to complete.
Potential Complexities
Finding the right balance between all of the three budgets can also be difficult. Saving must be substantial enough to cover unexpected expenses, while income must be sufficient to cover monthly ones. On top of that, expenses must be kept low enough to not exceed the income, while still being enough to live comfortably. Striking this balance can be complicated and difficult, and many people might find themselves quickly overwhelmed.
- Limited budget flexibility
- Long setup time
- Potential complexities
Additional Considerations
When debating the pros and cons of adopting a three way financial model, there are a range of additional considerations business owners and managers should keep top-of-mind.
Range of Different Models
Adopting a three way financial model should not be an automatic decision. There is an array of alternatives specific models to consider, each of which offer their own advantages and drawbacks. For example, the accrual model is the traditional accounting method that recognizes when revenue earned and expenses incurred — even if the cash has not yet actually changed hands.
On the other hand, the cash basis model is simpler, and some small business owners may find more convenience in it. This model is also often used for tax purposes as it only records income and expenses when cash is actually received or paid out.
Need for Further Financial Expertise
Prior to the adoption of a new financial model, business owners should ensure they have the required knowledge and expertise at-hand to ensure and endorsement of the model is made in a well-informed fashion. This may include help from a financial advisor and/or accountant, as well as legal counsel.
Ensuring the right level of financial expertise is available is paramount, as changes to a business’ financial model can be wide-reaching, and should be considered in light of the long-term financial forecast.
Managing the Transition to a 3 Way Financial Model
The implementation of a successful three-way financial model presents challenges to businesses. Taking the time to properly plan and organize the transition can help to mitigate potential risks and ensure the project is successful. The following steps can help to ensure a successful transition to a three-way financial model.
Defining Necessary Resources
The first step in any successful transition project is to identify the necessary resources for the project. This includes understanding the tasks that must be completed and the resources that will be needed to complete them. This may include technology and equipment, personnel, and budget. Having an accurate resource plan in place can help to ensure a successful transition.
Training Staff Members
Another important step to a successful transition is to ensure the staff members who will be working in the new system are properly trained. This is especially important in the case of a three-way financial model, as staff members need to be able to understand and use the new system efficiently and effectively. Taking the time to provide adequate training to all staff members involved can help to ensure a successful transition.
Planning for Unexpected Challenges
It is important to prepare for the possibility of unexpected challenges that could arise during the transition. This includes having a plan in place for addressing any issues that arise, and having the necessary resources to address them. Taking the time to anticipate potential challenges can help to ensure a successful transition.
- Define necessary resources
- Train staff members
- Plan for unexpected challenges
Summary
The three-way financial model is a financial system designed to provide funding for an institution or project from three distinct sources: the institution itself, sales or user fees, and external grants. This can be an excellent source of funding for certain types of projects, but there are also some challenges that come with this approach.
An Excellent Fit for Some Situations
The three-way financial model is ideal for projects that require a lot of upfront capital but have the potential for significant income down the line. This can be especially useful for educational institutions or nonprofits that are looking for ways to fund their operations and long-term goals. This model can also provide stability to these organizations, as they do not have to rely on only one source of funding.
The model also allows organizations to take advantage of different funding sources. For example, organizations can use their own funds to pay for certain upfront costs, while relying on grants or user fees to fund longer-term projects. This can be an effective way to manage finances and ensure sustainability.
Challenges of Moving to this Model
The three-way financial model is not without its challenges, however. Organizations may find it difficult to identify and secure all three sources of funding, especially if the organization is new and does not have an established history of working with lenders and grantors. Additionally, the model can be complex and take a long time to set up, and there is always the risk of the organization overextending itself and facing financial difficulties.
Furthermore, the organization must carefully manage its finances in order to ensure that all parties are satisfied and that the organization can meet its goals. This may require additional personnel or resources, depending on the situation.
Conclusion
Adopting a 3 way financial model may seem daunting at first, however, when examined in detail it could significantly benefit organisations by streamlining processes, operations and boosting profits. There are several trade-offs to consider, but when weighed up against the cost-efficiency, accuracy and improved operational performance, the benefits of this type of approach to financial management and accounting generally far outweigh the downsides.
To reap the full rewards of a 3 way financial model, organisations need to make sure that proper training is provided to staff on how to use the system, as well as providing the appropriate resources for its implementation. The proper use of this model should result in improved overall financial performance, elevated customer service and a reduction in unnecessary expenses and work.
Benefits Outweighing the Downsides
Adopting a 3 way financial model can significantly improve the way organisations handle their finances and accounts. It removes the need for manual intervention when passing information between different divisions, and puts in place automated processes that allow managers to have greater oversight. As a result, organisations can be sure that they are accurately forecasting, budgeting and reporting. What's more, the automation of certain processes may also lead to a more responsive and tailored customer experience.
Need for Appropriate Training and Resources
In order for a 3 way financial model to be successful, staff need to be given the proper training and knowledge on how to use and up keep the system. It is important that staff fully understand the changes that will be taking place and the different technology and system tools they will need to use. This can be accomplished through support from both internal and external sources. Additionally, organisations will need to make sure there are adequate technical resources to maintain and keep the system updated.