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Financial Modeling

by henrycruise
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Financial modeling

Financial modeling is the task of building an abstract representation (a model) of a real-world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.

Financial modeling is usually done in spreadsheet programs such as Microsoft Excel or Google Sheets. A financial model is often created to value a company and do projections for business plans, strategic planning, fundraising, etc. The extent and complexity of the model depend on the questions that need answering and the type of decisions required.

In general, there are three broad categories of financial models:

1- Simple Financial Models: These are relatively simple excel sheet models which incorporate some assumptions and perform some basic calculations to get to a result that can be used for decision making. For example, if you are considering purchasing new equipment, you may build a simple financial model which takes into account the cost of equipment and labor associated with it to calculate your Return on Investment (ROI).

 

2- Detailed Financial Models: These are complex excel models that usually have multiple input sheets where you enter assumptions such as revenues (or sales), expenses (or costs), capital expenditures, etc., and then link those inputs to build proform

Types of financial models

financial models available include:

  • Project finance models
  • Pricing models
  • Integrated financial statement models
  • Reporting models
  • Three-Statement Model
  • Discounted Cash Flow (DCF) Model
  • Merger Model (M&A)
  • Initial Public Offering (IPO) Model

Financial modeling for startups

When it comes to creating a financial model for your startup, you can choose between three different ways to approach the task.

  • You can create the model yourself by following an online financial modeling tutorial.
  • You can use a template or spreadsheet that someone else has created.
  • You can hire a financial modeling expert to build the model for you.

The first option — doing it yourself — is probably the most popular approach, and yet it’s probably the worst one as well. And this isn’t because you aren’t smart enough to make your own financial model; it’s because you are too smart. So better hire an expert to build the model for startups

Financial modeling and analysis

A financial model is an analytical tool used by financial analysts and management to predict the future performance of a company. It is a representation of a specific business situation in the form of a spreadsheet that depicts the cash flow, income statement, and balance sheet, as well as other financial metrics such as NPV, IRR, ROI, etc. The aim of using a financial model is to get insight into the performance of a business and the value of a business entity. Whereas Financial Analysis is the process of evaluating businesses, projects, budgets, and other finance-related entities to determine their performance and suitability.

Examples of Financial Models?

Examples of financial models available include:

  • Project finance models
  • Pricing models
  • Integrated financial statement models
  • Reporting models
  • Three-Statement Model
  • Discounted Cash Flow (DCF) Model
  • Merger Model (M&A)
  • Initial Public Offering (IPO) Model

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