§Financial modeling is a tool for determining likely financial outcomes based on a company’s historical performance and assumptions about future revenue, expenses and other variables. Financial modeling relies on financial forecasts: It takes a forecast’s assumptions and plays them out using a company’s financial statements to show how those statements may look in the future. Because models are created from financial statements, they most often generate results for a month, quarter or year.
§Most financial models are constructed in an Excel spreadsheet and require manual data entry. One of the simplest types, known as the three-statement model, only requires an income statement, balance sheet, cash flow statement and supporting schedules. However, the uses for models vary greatly, so some are much more complex. Businesses routinely customize models for their own purposes.
Financial Modeling: Budgeting & Forecasting
Why Financial Models?
Simplest way to compute performance and express projected outcomes.
Could advise regarding the grade of risk of associated with implementing certain decisions.
Can be used to devise an effective financial statement that reflects the finances and operations of the company.
Types of Financial Models.
Budget Model
This is used to model finance for professionals in financial planning & analysis (FP&A) to get the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.
Forecasting Model
This type is also used in financial planning and analysis (FP&A) to build a forecast that compares to the budget model. Sometimes the budget and forecast models are one combined workbook and sometimes they are totally separate.
