Modeling and you

As I was so fond of saying in college:

 

It's true you know. We do. And you should, too.

What is modeling?

Modeling is a big, scary economist word for doing something that we all do everyday. When we set our alarm to get up in the morning--factoring in showering, eating breakfast, driving to work, getting caught in office gossip on the way to our desk, the possibility of getting a flat tire and a thousand other little variables--we are actually modeling. Modeling is abstracting out the data of everyday life to come up with some kind of predictive tool to put our best guess on what is going to happen. 

Modeling ranges from the extremely simple (like the automatic process we go through when setting our alarms) to the mind-jarringly complex (like the models used to forecast the stock market). For most of us, we can focus on the slightly more simple.

Who should use modeling?

If you run your own business, you should be doing some form of modeling. Whatever stage of business you are in: pre-startup, startup, growth or established; modeling can provide insights into your business.

Why model?

1. Business plan feasibility - This is for everybody, but definitely for the early stage folks. Want to start your own business? It's important to know if your business can actually work. Already have your own business? It's important to know if your business is sustainable or if you should consider changes to your plan.

2. Knowing how much cash you are going to need - Trying to start a business? Knowing how much capital you are going to need is pretty crucial? Considering a new initiative in an existing business? Knowing how much capital you will need is also important to you.

3. Forces you to think about all aspects of your business - The process of creating a model makes you think about your business in a way different than conducting general operations. The dedicated process of considering the relationships between your employees, inputs, customers and processes opens new doors for insights into what is working and what may need a tune up.

4. Forecasting - Fortune telling is a myth, but using data to get an idea of what the future holds is reality. Having a glimpse into the future of your business creates an environment of proactive action.

5. Testing out new plans and strategies - Test out new initiatives and strategies virtually before investing real resources into their implementation.

How do I model?

Step 1: Identify what you want to know. What results are you looking for from the model? What question are you trying to answer?

Step 2: Identify your variables. What factors are going to come into play? Some of your variables are going to be independent (they stand on their own) and some will be dependent (they will change based on another factor). The key to producing a good model is identifying the important variables and determining what are the few key drivers of change for your model.

Step 3. Build the model. This might be where you need to get some help. I've typed this paragraph four times trying to explain how to get your model into Microsoft Excel. If you know how to do it, it's super easy...if you don't, then I can type a lot right here and not actually help.

If you've gotten this far and buy into the importance of doing some modeling for your business, or you have some questions about how modeling would really help you, reach out to me. I'd love to talk to you about modeling and get you pointed in the right direction for some additional resources.