A 3 Way Financial Model is a comprehensive financial management tool which is typically used by large businesses and organizations. It helps to assess the performance of the business or organization, optimize operational processes and facilities, and develop plans for the future.
Creating a 3 Way Financial Model requires knowledge and expertise, but the benefits it provides are manifold:
- Improved decision making
- Better business planning
- Enhanced forecasting
- Reduced risk
- Increased visibility into business operations
In this blog post, we'll look at understanding the benefits of a 3 Way Financial Model, and why it pays to consider incorporating one into your business.
- Higher accuracy in decision making
- Greater insight into business operations
- Full range of financial planning tools available
- Ability to generate real-time forecasts
- Reduce risk and improve financial security
Improved Ability to Make Accurate Financial Projections
In comparison to single-point financial models, a 3-Way Financial Model lets you accurately predict the financial implications of any given move by allowing you to consider three different scenarios. This makes it easier for decision-makers to identify the best path forward; a path with the highest probability of success and the least financial risk.
Using three different scenarios enables a much higher level of accuracy in projecting future financial results. With the three-way model, the user can easily determine the short-term impact, the long-term impact, and the worst-case scenario. This lets executives and financial teams look at more than one potential outcome and adjust their actions accordingly.
The three-way model also provides a visual representation of the potential outcomes. This allows financial teams to better understand the implications of their decisions and make more informed choices. It is much easier to understand the impact of a given decision when presented as a visual model as opposed to a long, numerical spreadsheet.
Utilize 3 Different Scenarios
The 3-Way Financial Model is able to consider the effects of three different scenarios that occur in the current market or environment. Each of the three scenarios is considered separately and their effects on the the financial landscape can be examined in the context of the entire financial model. This method allows executives to make faster and more precise decisions by looking at each potential outcome separately. This is especially important when making decisions for investments, growth, and other strategic choices.
Projections Become More Precise
The three-way financial model is able to generate highly precise financial projections by looking at three different scenarios. As a result, organizations have a much better understanding of their current and future financial position. This makes it easier to plan for potential outcomes, which can lead to more accurately budgeting, forecasting, and making strategic decisions.
The three-way financial model is a powerful tool that can give organizations an accurate and comprehensive view of their financial landscape. By utilizing three different scenarios, executives and financial teams can more accurately and confidently predict potential outcomes and make the best possible choices for their organizations.
Evaluation of Financial Risk
When creating a 3 way financial model, businesses should always evaluate potential risks and assess vulnerabilities. Understanding the potential financial risks that the model could incur is an important part of the process, as organizations must be prepared and aware of their environment in order to accurately forecast and budget.
Understands the potential risks
The first step in understanding the associated risks of a 3 way financial model is to brainstorm potential risks. This should be done by looking at all the impacted variables, and potential external forces that could derail a plan. Once the risks are identified and quantified, the organization can prepare for the worst, and can plan accordingly.
- Identify possible risks and levels of severity
- Understand the impact of external forces
- Quantify risks to prepare for the worst case
The next step in evaluating financial risk is to evaluate the vulnerabilities of the model. This allows the organization to understand weaknesses, and identify potential problems before they arise. By assigning a qualitative rating to each risk, the organization can begin to build mitigation plans, or alternatives. This allows the organization to be flexible in their approach.
- Identify vulnerabilities
- Develop mitigation plans or alternatives
- Assign qualitative ratings to each risk
Streamlined Budget Planning and Financial Forecasting
A 3-way financial model – also known as an integrated financial model – brings all income, expenses, and cash flow elements together into a single, unified system for budgeting and forecasting. This type of model helps to reduce complexity and streamline budget planning, resulting in a more accurate financial forecast.
Easier to Analyze Financial Data
By combining the elements of income, expenses, and cash flow, a 3-way financial model simplifies the job of analyzing financial data. Instead of having to work with three separate areas all at once, users can focus on managing one single financial model. This allows for better visibility, faster decision-making, and more consistent financial forecasting.
Clear and Concise Budget Planning
A 3-way financial model also helps in efficient budget planning. A unified model provides users with a clear view of all financial scenarios, allowing them to quickly identify cost savings opportunities, as well as other areas that need improvement. Additionally, this type of model enables users to create highly detailed budgets in one place, which can then be used for tracking and analysis.
Some of the most popular tools for budget planning include Microsoft Excel, budgeting software, and cash flow forecasting tools. These tools provide users with various budgeting tools and data analysis tools, which can be used to create detailed budgets and financial forecasts.
- Easier to analyze financial data
- Clear and concise budget planning
Gaining Access to Financing and Investment Capital
One of the major benefits of a 3 Way Financial Model is its ability to improve credibility with lenders and investors. When you build a 3 Way Financial Model, you're effectively showing prospective lending or investor partners that you have a solid understanding of your business and financial goals. In turn, this can help you demonstrate why investment in your business is a smart move, and result in increased access to the financing and capital you need to fuel your business.
On top of better access to financing and capital, having a 3 Way Financial Model can help you build relationships with lenders and investors. Having clearly communicated financial goals can foster a better understanding of where you hope to take your business. This can demonstrate your commitment and dedication to your business plan, building trust and potentially better reception from lenders or investors.
6. Increased Flexibility
The 3 way financial model is designed with increased flexibility in mind, allowing financial analysts and business leaders the capability to adapt quickly depending on the evolving conditions and changing financial forecasts in the current market.
a. Changing Financial Forecasts
With the 3-way financial model, significant changes to the financial forecasts of a project can be considered and inputs can be easily changed to reflect the new information. This allows businesses to adjust their models according to external factors, such as economic downturns, sudden interest rate changes and changes in energy prices and inflation.
b. More Capability to Adapt Quickly
The level of flexibility in the 3 way financial model also extends beyond financial forecasts. Businesses can swiftly adapt in response to changes in customer needs, technological advances and innovations in their respective industries. This can provide organizations with the agility and foresight to quickly pivot and position themselves in what can be an ever-changing business landscape.
- Increased flexibility for adjusting financial forecasts
- Ability to quickly adapt in response to external changes
A 3 way financial model is an advanced modeling tool used by organizations to assess and analyze their financial performance. With rigorous forecasting and reporting based on historical and expected data, it can provide an in-depth review of an organization's finances. The benefits of the 3 way financial model include improved planning and risk management, better decision making, enhanced understanding of financial data, improved communication, and heightened profitability.
Benefits of 3 Way Financial Model
- Improved planning and risk management.
- Better decision making
- Enhanced understanding of financial data
- Improved communication
- Heightened profitability