Financial Modeling summarizes companies' expenses and profits in spreadsheets to make financial decisions (Benninga, 2014). CFOs and CEOs can use these tables to analyze a company's current position and forecast its future performance.
In this discussion, I will choose a financial model, analyze its data, and describe its usefulness to the financial manager and future decisions.
Types of Financial Models:
There are many financial models, the most important of which are the three-statement Models (Discounted Cash Flow (DCF), Merger (M&A), Initial Public Offering (IPO), Leveraged Buyout (LBO), Sum of the Parts, Consolidation, Budget, Forecasting, and Option Pricing).
I will choose the first model.
Three Statement Model:
According to (CFI, n.d.), this model is the basis for the financial modeling process; it is linked to the three most important financial statements: (income statement - balance sheet - cash flow).
- Income Statement: It is the list that shows how profitable or losing companies are, this is to find the difference between expenses and revenues, (Penman & Penman, 2010).
- Balance Sheet: The list shows the company's assets, liabilities, and shareholders' equity.
- Cash Flow Statement: The list shows the incoming and outgoing cash flows.
Practical Example:
According to (CFI, n.d.), in this form, we see that the company's financial statements have been entered for 7 years; both (income statement - balance sheet - cash flow) were placed in one sheet; through this, the CFO can calculate growth, revenue and turnover metrics, in addition to adding some assumptions about the revenues that the company wants to achieve in the coming years, the list can then be modified to fulfill those assumptions in the future, (Ciubotariu, Zlati & Nuca, 2019).
Conclusion
Financial modeling is the presentation of a company's past, present, and future operations. Its primary objective is to estimate costs, forecast profits, and forecast the impact of certain events on the company's operations. As a result, companies can change their strategies and allocate and optimally use their resources (Street of Walls, 2013).
References
Benninga, S. (2014). Financial modeling. MIT Press.
https://mzfsir.weebly.com/uploads/6/3/0/5/6305731/financial_modeling.compressed.pdf
Ciubotariu, M., Zlati, M.-L., & Nuca, D. (2019). New Approaches to Testing Economic Vulnerabilities by the Econometrical
Modeling of the Reported Financial Elements. USV Annals of Economics & Public Administration, 19(2), 175–184.
CFI (n.d.) Types of Financial Models.
https://corporatefinanceinstitute.com/resources/knowledge/modeling/types-of-financial-models/
Penman, S. H., & Penman, S. H. (2010). Financial statement analysis and security valuation. New York: McGraw-Hill/Irwin.
Street of Walls (2013). Financial Modeling of Investment Banking Technical Training. Retrieved from
http://www.streetofwalls.com/finance-training-courses/investment-banking-technical-training/financial-modeling/