28 February 2020 AnkitChadha

Essentials of Financial Modelling

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When asked to define a financial model, several people come up with long-winded explanations using terms such as forecasting, cash flow, and hypothetical outcomes. However, the description doesn't need to be so complicated. A financial model is a device (typically developed in Excel), which shows possible solutions to a business problem in the real world. And the task of creating a financial model is financial modelling.

You need to understand what financial modelling is, who uses economic models, and why financial modelling matters before you plunge into developing business models.

 

What Is Financial Modelling?

Financial modelling reflects some or all aspects of a firm's activities in numbers. Such models are meant to be used as instruments for decision-making. Company executives could use them to forecast costs and predict the income of a new project being planned. Our financial analysts use these to predict the effect on a company's stock of an economic policy change or any other case and accordingly provide financial advisory.

 

How to implement Financial Modelling?

Financial modelling is simply a device designed in Excel to predict the financial performance of a company into the future. The forecast is usually based on the company's historical performance, forward-looking assumptions, and includes a statement of revenue, balance sheet, cash flow statement, and supporting schedules (known as the a3-state model).

From there, more advanced models like discounted cash flow analysis (DCF model), leveraged buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis is built. An example of financial modelling in Excel is provided below.

 

Why Financial Modelling?

Financial modelling measures a company's worth or to equate businesses to business peers. These different test scenarios in strategic planning are used to calculate the cost of new projects, agree on budgets and assign organizational resources.

 

What Is the Use of Financial Modelling?

The output of financial modelling is used for decision making and performing financial analysis, whether inside or outside of the company. Inside a company, executives will use financial models to make decisions about:

  • Increasing capital (debt and equity)
  • Creating acquisitions (businesses and assets)
  • Expanding the business organically (i.e. opening new stores, entering new markets, etc.)
  • Selling or separating assets and business units
  • Planning and forecasting (planning for the years ahead)
  • Capital allotment (priority of which projects to invest in)
  • Evaluating a business

 

Why Is Financial Modelling Important?

Financial modelling reveals, assesses, and predicts the success of a company. The primary purpose is to re-create the actual business digitally. Once the above variables are generated for the company, then our financial advisors will insert various economic impacts that can alter those figures. Then decisions are measured quantitatively.

In general, we do this by testing hypotheses to analyze the impact they may have on the future financial performance of the company. Assumptions that tests for a financial model include growth rates, operating margins, product lines and individual segments, and refinancing and recapitalization.

 

Select A Reliable Financial Modelling Service

As you know, financial modelling is a description of the performance of a company based on certain factors that enables your business to predict future financial results.  In other words, it lets a company look quantitatively at the possible financial consequences of a decision. The metrics and expertise are used by our financial experts to develop a model that includes the experience of the operations, accounting, corporate finance, and spreadsheets of excellence. We use our research and knowledge to provide expert services for both Domestic and International Clients. To know more about us or for queries, contact us!