Financial analytics is an inseparable part of businesses and helps company owners make sound and effective economic decisions.
Furthermore, it also helps owners evaluate their company’s performance and make strategies accordingly. One such aspect of financial analytics is financial modelling.
In this blog, we will explore all about what financial modelling is, what it can be used for, its types, and its benefits. Continue reading to know more!
What is Financial Modelling?
Financial modelling is the act of creating a thorough summary of an enterprise’s earnings and expenses in the form of a spreadsheet.
Since financial modelling helps companies understand the impact of a future decision or event, it is one of the most helpful and sought-after aspects of financial analysis.
Financial models are typically prepared based on a company’s historica data and assumptions about future performance. Some of the requirements that should be met in order to successfully create a financial model are cash flow statements, balance sheets, and supporting schedules.
What Can Financial Modelling Be Used For?
Essentially, financial modelling is used to make more informed decisions in a company. It can be used to make decisions about the following:
- Business valuation
- Forecasting and budgeting
- Raising capital
- Organic business growth
- Financial statement analysis
- Selling business assets
- Accounting management
- Capital allocation
Types of Financial Modelling
Companies use various kinds of financial models based on their needs and requirements. Below, we will discuss 5 such commonly used financial modelling techniques:
- Three-Statement Model: The three-statement model is the commonest form of financial modelling. In this model, three statements, cash flow, balance sheet, and income statement, are plugged into a spreadsheet and linked with the appropriate formulae to get a dynamic model that can predict future statements.
- Merger Model: This modelling technique is used to analyse two companies that are planning on merging together. This advanced model helps companies understand the dilution or accretion of a merger.
- Discounted Cash Flow Model: Simply put, the discounted cash flow model helps estimate the value of an investment by generating projections about how much money that investment will bring in the future. This modelling technique enables business managers and owners to make effective expenditure-related decisions.
- Budget Model: Budget models primarily focus on income statements and help business owners set a budget for a specified period based on their current monthly or quarterly figures.
- Forecasting Model: This modelling technique is usually a part of budget models. It is used to create a financial forecast that can be compared to the budget model. Both these models combined can help businesses avoid extra expenditures and stay within their pre-determined budget goals.
Benefits of Financial Modelling
The major benefits of financial modelling are discussed here:
- Performance Review: Financial modelling helps business owners compare the actual results of the business with the set budget in real-time. Hence, owners get to analyse and rectify any setbacks and, thus, improve their overall performance and increase profits.
- Risk Management: Since financial modelling lets business owners know the future impact of any economic decision, it helps significantly minimise the common risks associated with any financial agreement. Furthermore, companies become more aware of potential risks and how to manage them.
- Business Valuation: Financial models provide extremely accurate business valuations based on data such as cash flow, net income, and so on. This valuation not only helps business owners understand their worth in the market but also aids in possible restructuring or mergers.
- Accurate Budgets and Forecasts: Financial models are based on tangible data and formulae; hence, they provide rather accurate budgets and forecasts. Company owners can use both of these to stay within their financial goals, even while performing well in the market.
- Business Growth: Financial modelling helps paint an accurate picture of the economic outcome of any possible project or investment. Hence, owners and managers get a clear understanding of where they should invest money and where they should not. Thus, with more informed decision-making, financial modelling helps businesses reach new heights.
Financial modelling is a critical aspect of financial analytics that help enterprises understand their current economic situation and also forecast future financial outcomes. Hence, both big and small businesses are eagerly on the lookout for highly qualified and talented financial analysts to join their teams and help their companies grow unparalleled.
In this regard, the Financial Analysis Prodegree offered by Imarticus is the perfect course for individuals who want to seize this demand in the market. The financial analysis course is taught in collaboration with KPMG and includes exciting features like live online training, extensive career support, certification, and so on. The course duration is only 4 months, and by the end of it, you will certainly be a high-performing financial analyst. So, sign up today!