In the dizzyingly dynamic business landscape, staying ahead of trends and major events provides a tremendous competitive advantage. As digital tools become increasingly sophisticated, financial models become more complex and detailed. Indeed, professionals have been leveraging cutting-edge technology in their models, such as predictive AI, deep learning, big data analysis, and a wide range of algorithms.
Such tools must incorporate macroeconomic factors to provide valuable financial modeling services and maximize opportunities. After all, the economy is not an isolated entity from reality, and events on the other side of the world can have a profound impact locally. That’s why investors who don’t want to be caught off guard seek the expertise of financial modeling consultants like Acquinox Advisors.
Here’s how major macroeconomic events can impact businesses around the world and why they are considered the best financial modeling services.
Modeling the Past, Present, and Future
The global economy has never been more interconnected. Even the smallest business can feel the sting of rising inflation, interest rates, and exchange rates. Businesses that fail to include these crucial variables in their models are flirting with disaster.
However, despite the array of software and apps available for this task, it’s not easy to do so effectively. In this context, financial modeling services by AcquinoxAdvisors can be the difference between profitability and bankruptcy. Typically, a financial modeling service utilizes a company’s track record of past and present operations to project its future performance.
A financial forecasting & modeling expert also assists in calculating the probable costs and profits of a new project. Such projections serve as guidance for business decisions. This is where macroeconomics comes into play. Here’s how they can impact a business’s financial model.
Inflation
Inflation is like a subtle rain that may not be noticeable initially but eventually soaks everything. It affects all costs, from critical supplies to wages.
Efficient financial modeling services track inflation levels and trends to predict the costs and revenue of a company, helping it navigate the challenges of rising inflation.
Interest Rates
Interest rates exert a significant influence on the economy. When rates rise, it becomes more expensive for companies to borrow money, creating a ripple effect throughout the economy. Conversely, when rates decline, it might be an opportune time to consider borrowing money for financial expansion. In other words, interest rates can dramatically alter the costs and profitability of financing a new project. Therefore, the factor of “interest rate sensitivity” must be included in every model.
Exchange Rates
In a dollarized economy, fluctuations in exchange rates can destabilize companies that rely heavily on imports. While exchange rate fluctuations are difficult to predict, their negative impacts can be mitigated. Since currency rates influence importation strategies and can change rapidly, dynamic models that track each fluctuation are essential. Such models provide valuable insights into business sensitivity to exchange rate fluctuations and offer valuable exchange rate forecasts.
Geopolitical Factors
It’s crucial to remember that the global economy is not isolated from the real world. Geopolitical events can disrupt all of the aforementioned variables. Unfortunately, trade wars, actual wars, natural disasters, and sudden political changes can cause significant disruptions in the market.
Companies can enhance their resilience to such factors by incorporating contingency plans into their models. For example, when petrol prices surge, it sends ripples across the entire supply chain, impacting everything from energy production to the transportation of goods.
Conclusion
The financial analytics market has experienced significant growth in recent years. In 2023, this industry generated revenue of USD 8.4 billion, and it is projected to nearly triple in size by 2032. The increasing volatility of the macroeconomic landscape necessitates a proactive approach, careful planning, and a degree of foresight.
Given the volume and volatility of macroeconomic variables, it’s easy to develop overly complex models. Such complexity defeats the purpose of these models, as they must be easily understandable to be truly useful. Moreover, these models must be fed with accurate and up-to-date data reflecting macroeconomic changes.
Financial models are intended to be dynamic, and relying solely on fixed values instead of comprehensive formulas is a serious oversight. However, businesses must exercise caution when utilizing these formulas, as formula errors can compromise the entire model’s integrity. That’s why more companies are seeking professional advisory services to prepare them for the future.