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Understanding Financial Models Explained

A financial model is a tool used to calculate, forecast, or estimate financial numbers, ranging from simple formulas to complex computer programs. These models are utilized in various fields such as project finance, investment banking, and personal finance, with users including business owners, finance professionals, and individuals. Key types of financial models include Discounted Cash Flow, Comparative Company Analysis, and Leveraged Buy Out models, and expertise in financial modeling requires strong skills in accounting, finance, and Excel.

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22 views3 pages

Understanding Financial Models Explained

A financial model is a tool used to calculate, forecast, or estimate financial numbers, ranging from simple formulas to complex computer programs. These models are utilized in various fields such as project finance, investment banking, and personal finance, with users including business owners, finance professionals, and individuals. Key types of financial models include Discounted Cash Flow, Comparative Company Analysis, and Leveraged Buy Out models, and expertise in financial modeling requires strong skills in accounting, finance, and Excel.

Uploaded by

bavakhan786
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What Is a Financial Model?

According to Moneyterms,

A financial model is anything that is used to calculate, forecast or


estimate financial numbers. Models can therefore range from
simple formulae to complex computer programs that may take
hours to run.

In short, financial models are mathematical models in which variables are linked
together.

For sophisticated models such as Discounted Cash Flow (DCF) model, you need to
use computer.

Microsoft Excel skills are must to build or update financial models.

There are computer programs built for high-end and complex financial models such as
—Value-at-Risk(VAR) models used in risk management.

Where Can You Use Financial Models

Financial models are used in:

 Historical analysis of a company


 Projecting a company’s financial performance
 Project finance
 Real estate investments
 Oil & Gas projects
 Banks & Financial Institutions
 Personal finances
 Non-profit organizations
 Government
 Investment banking
 Equity research

Users of Financial Models

There are four main groups of users that use financial models.

1. Business owners and entrepreneurs


2. Finance and Accounting professionals
3. Financial Modelers and Consultants
4. Individuals for personal finance

Let’s see the areas where you, as a financial analyst, can use financial modeling skills.

 Forecasting future raw material needs


 Valuation of a security
 Benefits of a merger
 Check the size of the market opportunity
 See the roadmap to profitability
 Check investment requirement
 Quantify and predict risk
 Portfolio performance
 Identify undervalued securities

The question comes to mind that only one financial model is useful or we need to use
different types of financial models.

Types of Financial Models

There are different financial models that you can use as per the need.

 Discounted Cash Flow model


 Comparative Company Analysis model
 Sum-of-the-parts model
 Leveraged Buy Out (LBO) model
 Merger & Acquisition (M&A) model
 Industry-specific financial model
 Option pricing model
 Corporate finance models

These financial models are used to solve different problems.

As a financial analyst you should know the time and type to use a financial model.

To gain expertise in financial modeling, you should know the financial modeling
basics.

Financial Modeling Basics


Learn Financial Modeling

Are you preparing for financial modeling jobs? Then only downloading financial
modeling templates won’t help. This will help:

1. You should be good in Accounting, Finance and Valuation and financial


modeling Excel skills.
2. Ask yourself, “What problem I’m going to solve by creating this financial
model?”
3. You should know the scope, benefits and limitations of financial modeling.
4. Remember: Garbage in garbage out principle. So, check your inputs.
5. Your model should be simple, easy to understand and flexible enough to
accommodate future revisions.
6. Time management is a key aspect in financial modeling. Don’t get
overwhelmed by numbers and calculation part in spreadsheets.
7. Lastly, you should be able to take a decision based on your financial model.

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