What Is Financial Modeling?

Financial modeling is the process of creating a summary of a company's expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision.

A financial model has many uses for company executives. Financial analysts most often use it to analyze and anticipate how a company's stock performance mi🍌ght be affected by future events or executive decisions.

How Financial Modeling Works

Financial modeling is a representation in numbers of a company's operations in the past, present, and forecasted future.

These models are intended to be used as decision-making tools. Company executives might use them to estimate the costs and project the profits of a proposed new project. Financial analysts use them to explain or anticipate the impact of events on a company's stock, from internal factors such as a change of strategy or business model to external factors such as a change in economic policy or regulation.

Financial models are used to estimate the 澳洲幸运5开奖号码历史查询:valuation of a business or to compare businesses to their competitors. They are also used in strategic planning to test various scenarios, calculate the cost of new projects, decide on budgets, and allocate corporate resources.

Examples of financial models may include discounted cash flow analysis, 澳洲幸运5开奖号码历史查询:sensitivity analysis, or in-depth appraisal.

Example of Financial Modeling

The best financial models provide users with a set of basic assumptions. For example, one commonly forecasted line item is sales growth. Sales growth is recorded as the increase (or decrease) in gross sales in the most recent quarter compared to the previous quarter. These are💃 the on♈ly two inputs a financial model needs to calculate sales growth.

The financial modeler creates one cell for the prior year's sales, cell A, and one cell for the current year's sales, cell B. The third cell, cell C, is used for a formula that divides the difference between cells A and B by cell A. This is the growth formula. Cell C, the formula, is hard-coded into the model. Cells A and B are input cells that can be changed by the user.

In th🏅is case, the purpose of the model is to estimate sales ꦚgrowth if a certain action is taken or a possible event occurs.

Of course, this is just one example of financial modeling. Ultimately, a stock analyst i💦s interested in potential growth. Any factor that affects or might affect that growth can be modeled.

Also, comparisons among companies are important in concluding a stock purchase.🐓 Multiple models help an investor decide among various compღetitors in an industry.

Explain Like I'm Five

Financial modeling ♊is using the past to predict the future. Businesses use financial models to make decisions. A business might create a financial model to raise money, grow the business, or make a budget.

The Bottom Line

Financial modeling is a set of numerical techniques used to forecast a company's future growth. Based on the information in a company's income statement, balance sheet, and estimates of future economic conditions, analysts can create sophisticated projections of an investment's future performance.