Description

The financial model is a representation of the numbers of a company’s operations in the past, present, and the forecasted future. Such models are intended 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 to estimate the valuation of a business or to compare businesses to their peers in the industry. They also are 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, sensitivity analysis, or in-depth appraisal.
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 as the increase (or decrease) in gross sales in the most recent quarter compared to the previous quarter. These are the only 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 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 in the model. Cells A and B are input cells that can change by the user.
In this case, the purpose of the model is to estimate sales growth. If a certain action or a possible event occurs.
Of course, this is just one real-world example of financial modeling. Ultimately, a stock analyst is in potential growth. Any factor that affects or might affect that growth can model.
Also, comparisons among companies are important in concluding a stock purchase. Multiple models help an investor decide among various competitors in an industry.