What is financial modeling?

Financial Modeling is the process of calculating the performance of a project or company by using mathematical calculations. This type of financial analysis is often required before investment decisions are taken or when creating new financial instruments to predict future performance

The goal of financial modeling is to help you make better decisions about your company by providing accurate projections for how much money you will generate in revenue and expenses over time. This financial summary shows a company’s expenses and earnings and is often used to measure the impact of future executive decisions or events.

Typically, a financial model forecasts the three financial statements which include the profit and loss statement (or income statement), the balance sheet (BS), and the cash flow statement (CF).

Not only do models allow you to study historical performance, but they also allow you to estimate future cash flows as well. To gain a deeper understanding of an organization’s current standing, it is also recommended to look at a wide range of metrics such as churn rate, rate of return, growth rates, and more when evaluating actual performance.

A company’s financial statements are often used and shared to communicate essential financial information among investors, banks, and other key stakeholders within an organization.

Understanding financial modeling

A financial business model is designed to illustrate an organization’s operations in the past, present, and future. While financial models may differ depending on the inputs and assumptions involved, they are often used as decision-making tools to support business planning among company executives and leadership to help with future performance. Financial models can also be used to estimate a company’s cash flow valuation, which can be used as a benchmark and compared to other players within an industry.

Finance teams also depend on these financial forecasts to help steer strategic planning. From scenario planning to changes in business strategy, financial models allow you to test various scenarios through a set of basic assumptions. 

Once you have defined your assumptions, you can use them to create different scenarios. You can even run multiple simulations to see which one best fits your needs.

Modern Finance functions depend on financial planning software that makes it easy to create financial models, evaluate financial performance, and conduct greater cash flow analysis within a single solution.