What is financial modeling? Basics, Types and importance.

In present era many people or say about more than 60% don’t know what financial modeling is? It is not only Valuation or budgeting or forecasting, it is much more than that. It is a tool to make calculation in easy and faster way.

LET CHECK WHAT IS FINANCIAL MODELING…

Financial modeling

Financial modeling is anything that is used to calculate, forecast the financial number automated calculation of given data and making recommendations. It can be a simple formula or a set of complex financial equations.

Famous website investopedia for financial information describe it as “The process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security. The model is usually characterized by performing calculations, and makes recommendations based on that information. The model may also summarize particular events for the end user and provide direction regarding possible actions or alternatives. A model, for example, can summarize investment management returns, such as the Sortino ratio, or it may help estimate market direction, such as the Fed model.”

Use of financial models

• Historical analysis of a company
• Projecting a company’s financial performance
• Project finance
• Investment planning
• Equity search
• Company/firm valuation
• Personal finance
• Budgeting
• Investment banking
• Government
• Bank and financial institutions

Users of financial models

• Business owners and entrepreneurs
• Finance and Accounting professionals
• Financial Consultants
• Individuals for personal finance

The areas where we 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
• To check the profitability
• Check investment requirement
• Quantify and predict risk
• Portfolio performance
• Identify undervalued securities

What are the types of financial modeling?

• There are different financial models that we can use as per our requirement.
• 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
• Discounted Cash Flow model
• All the above mentioned models are being use to solve different problems.

What do we required to do financial modeling?

• You should know accounting/finance and valuation
• You should know excel
• KNOW “what problem are you going to solve”
• You should know the scope, benefits and limitations of financial modeling
• Model should be easy to understand
• Model should be flexible enough to revise in future
• It should decision maker

 So now if you are not doing company valuation it doesn't mean, you don't know modeling, you know but it is just you are not working on valuation. 

SO DON’T GET CONFUSE AND HAPPY MODELING…. :)