Development of a financial model for business in Ukraine

Building a successful business requires a precisely planned road map. Many mistakes in doing business can be avoided if you understand in advance the prospects and risks of this or that decision. 

This means that when starting a project in Ukraine, or any other country, you should take care to have:

• company development plan;
• a plan for achieving the goal;
• financial model.

All three points are tightly interconnected, but today we are going to talk about the financial model, a tool that gives you the opportunity to decide, even before you start the project, whether it is worth launching.

The financial model is the goals and ways of achieving them, expressed in numbers and estimated figures. When developing the financial model, one simulates different scenarios of business development, such as:

• changes in markets and sales channels;
• changes in revenue and cost of sales;
• change in expenses;
• changes in the value of assets.
• other indicators.

Please note! The financial model is one of the mandatory components of a business plan in attracting investment and creditors.

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Why spend money and time creating a financial model if I don’t plan to attract investment?

While creating a financial model, three scenarios of business development are created (Best, Normal, Bad), which allow the owner to:

• determine the factors affecting the efficiency of the business;
• define or adjust the company’s development strategy;
• determine the needs for attracting credit funds and investments.

With the financial model, we get projected forms of financial statements (for three scenarios of business development):

• balance sheet;
• profit and loss statement (P&L);
• cash flow statement.

The easiest way to understand the benefits of a financial model and ways it is developed is through examples. So, let’s look at an example.

We were contacted by a client, the owner of a company that produces ecological packaging, plans to apply for funding from the EBRD to implement an ecological project (a new product group - starch bags).

This case didn’t require the financial model to launch the project, but to show the prospects of the project to investors, and in case of possible problems in the model – to eliminate them.

The company has an accounting department, but its staff has no experience in financial planning and economic analysis. We have the necessary staff of lawyers, accountants and business analysts, so we undertook the development of the client’s financial model.

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Financial Model Development Stages

1) Filling out a brief.

The brief is prepared for all participants of the process to understand the goal to be achieved and the ways to achieve it. The brief is drawn up jointly by our specialists and the client (or by the client).

Our specialists filled out the brief together with the client. We filled in the following information in detail:

• company registration information;
• types of business activities;
• the purpose of creating a financial model (in our case - obtaining financing from the EBRD);
• project description;
• the amount of investment that is planned to be attracted;
• conditions for attracting investments;
• level of competence of staff involved in the project;
• target audience of the project;
• market coverage and competitors;
• advantages and disadvantages of the project.

The brief shall be accompanied by the client’s estimations:

• sales plan;
• cost plan;
• other cost plan;
• production plan;
• marketing plan;
• capital investment plan;
• financial data of the company’s activities for the previous 3 years.

2) Development of the 1st version of the financial model and coordination with the client.

Based on the plans received from the client, we prepare a financial model (in Excel with formulas and cell references), which contains the following information:

• financial model glossary;
• methodological assumptions (project term, forecast period term, forecast step, forecast and model currency, and others);
• project implementation schedule;
• sales plan for the project (3 scenarios);
• staffing and payroll costs plan (3 scenarios);
• project cost plan (3 scenarios);
• project cost plan (3 scenarios);
• investment plan;
• cash flow plan (3 scenarios);
• profit and loss – P&L (3 scenarios);
• projected balance sheet (3 scenarios);
• calculation and evaluation of project efficiency;
• risk analysis;
• assessment of project sensitivity to changes in key parameters.

3) Development of the final version of the financial model.

We made adjustments and changes to the financial model based on the results of coordination of the 1st version of the model with the client:

• in terms of income – we reduced the income part to the real market situation;
• in terms of personnel and payroll expenditures – we adjusted the structure of personnel and their payroll;
• during the development of the financial model the client had a competitor – we added information to the risks associated with this change.

4) Integrating the financial model into a business plan.

All documents (business plan, financial model, etc.) relating to the project should be interrelated and complementary parts. These documents must not contradict each other. At this stage, we perform integration (introduction and verification) of financial data stated in the business plan and other related documents.

Developed financial model allowed the owner to revise the expected results of the project due to its high sensitivity to changes, and to increase the amount of expected investment.

The financial model is a mandatory mechanism for managing an effective business and will help you in making a decision if you plan to:

• set up a new business or project;
• attract investors or creditors;
• restructure the company;
• develop a growth strategy for your existing business.

Do you want to know about the prospects and risks of your project before it starts in Ukraine? Don’t hesitate to contact us! We will not only help you with tax, legal and financial planning, but also take care of all the legal aspects of the process.

Learn more about our services here:

Setting up business in Ukraine.

Business legal support.

Accounting support of business.

Tax optimization and planning.