A process of constructing financial representation in a specified format that makes it easy to understand and evaluate the financial aspects of the any particular company or security. 'Financial Modeling' is the vital tool for the financial and capital markets analysis.
Financial modeling helps in action planning and for change in financial planning or investment decisions. The financial models usually characterized with performing calculations, to analyze and make decisions or recommendations based on that analysis. Broadly, Financial models help to summarize particular events, 'like expansions, effects of economic conditions, outcome of mergers and acquisition or estimated future outlook' for the end users and provide direction regarding possible actions or alternatives available.
Modeling can be used in any form as find suitable for particular individuals or organization from very simple presentation models to complex cause and effect models. Basically the approach to construct financial models vary with the choice of end users and models can be in the form of software to be used again and again or just as simple to construct with pen and paper or few entries on excel sheet which represent the required financial figures. In most of the cases excel sheets are widely used as platform to construct financial models.
In simple words, The process of constructing formula in excel or any computer program, into which users enter information as input and the system evaluates with pre-programmed logic to return output to the user.
However, the underlying objectives of constructing financial models are their purpose and not the kind of user interface used. A model, can help summarizes core financial evaluations for example, the merger or acquisition effects or return on investments or it may also help estimate market direction. Some more financial models are...
Investment-Trading-Return models often used 'with different names' to determine optimal trading practices. These systems generate output of different types of data including buy and sell signals. Budget-Actual-Variance’ is the financial model for company budgeting and planning. This model widely used for management reporting, and help financial and investment partners. If you practically want to experience the financial model structure and work, you can download the demo financial model here, and yes its demo by the respective company and is absolutely free and I have personally used and evaluated this model before referring. If you need details if prefer to recommend, the other well explained five year detailed excel model, also demo and free, can be download as PDF file here.
In conclusion we can say, Financial Models are tools used for evaluating "what-if" simulations to answer key financial questions:
- What's the profit outlook of the company? How much? When?
- What is the company cash-flow position? And for those' who wonders what's the term cash flow is’ very simply cash-flows include cash inflows company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments.
- What's the company financial position vis-à-vis Industry?
- How much liquidity the company has, how much will company need and when the liquidity will requires the most?
- How the company investment surpluses utilized and what are its returns and what the future estimates on investment situation and returns.
- What techniques company implement for the uncertain financial conditions? 'Exactly what we are witnessing today in global financial crisis' safe and risk management techniques like hedging or whatever’.
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Financial AnalysisFinancial Analysis, Financial Modeling, Financial and capital markets analysis, Investment decisions
