Financial Modeling Insights You Wish You’d Have Known Earlier
Financial modeling is actively used by businesses to guide their financial planning and strategic decision-making. Financial models provide data-driven, quantitative analysis that shows you where your company is and where it is going.
Having said that, one model cannot do it all. As a finance professional, you will require various types of financial analysis and modeling for various situations. This post will walk you through the fundamentals of financial modeling and provide you with examples and tools of financial modeling that you can use to evaluate corporate decisions from a financial standpoint. #TWN
Trying to grow a successful startup without a financial model is like driving across the country without a map—you'll have a difficult time getting there.
You can use your model to plan your route and course correct whenever you stray off course.
Before you embark on your startup journey, you must select the best navigation tool (your financial modeling tool) to help you along the way. And that's precisely what we're going to assist you with today.
We'll walk you through the following steps in this blog:
- What Is Financial Modeling?
- The Basics of Financial Modeling
- Real-World Financial Modeling Example
- Financial Modeling Software
Let’s get started!
What Is Financial Modeling?
Combining critical accounting, finance, and business metrics to create an abstract representation, or model, of a company's financial situation is what financial modeling entails. This exercise assists a company in visualizing its current financial situation and forecasting future financial performance.
Financial modeling can come in handy in a variety of situations. It can help to inform investment decisions, securities pricing, and corporate transactions like mergers, acquisitions, and divestitures.
However, the most common application of a financial model is for operational business decisions and financial analysis. Financial models are commonly used by executives to make decisions about:
- Budgeting and forecasting
- Valuing the company
- Organic business growth
- Acquiring new assets or other businesses
- Raising capital in the form of debt or equity
- Distributing the organization’s financial resources
- Prioritizing projects
- Divesting or selling assets and business units
- Risk management
It may appear to be an overwhelming number of topics requiring financial models; however, most established companies have taken the time to create financial modeling Excel templates that speed up the decision-making process. But this raises the question of who builds all these financial model templates.
Before getting to it, let’s go over the fundamentals of financial modeling.
Financial modeling is a numerical representation of a company's operations in the past, present, and projected future. These models are designed to be used as decision-making aids. They could be used by company executives to estimate the costs and forecast the profits of a proposed new project.
They are used by financial analysts to explain or forecast the impact of events on a company's stock, ranging from internal factors such as a change in strategy or business model to external factors such as a change in economic policy or regulation.
Financial models are used to estimate a company's valuation or to compare companies to their peers in the industry. They are also used in strategic planning to test different scenarios, calculate the costs of new projects, set budgets, and allocate corporate resources.
Discounted cash flow analysis, sensitivity analysis, and an in-depth appraisal are all examples of financial models.
Who Builds Financial Models?
Because financial models have such a wide range of applications, they are created and used by a wide range of financial professionals, including but not limited to:
- Investment bankers
- Corporate development analysts
- Equity research analysts
However, in the context of the modern company, those involved in financial planning and analysis (FP&A) are the most likely to be developing and deploying financial models that guide the company's direction.
The FP&A team is an important part of the CFO's office. It oversees the company's financial planning. That is, the FP&As develop the budget and perform financial forecasting to assist the CFO and other members of senior management in understanding the company's financial situation.
In addition to budgeting and forecasting, the FP&A team is responsible for decision-making support and special projects such as market research and process optimization.
Real-World Financial Modeling Example
The best financial models give users a set of fundamental assumptions. Sales growth, for example, is a frequently forecasted line item. The increase (or decrease) in gross in the most recent quarter compared to the previous quarter is recorded as sales growth. A financial model requires only these two inputs to calculate sales growth.
The financial modeler creates one cell for sales from the previous year, cell A, and one cell for sales from the current year, cell B. Cell C is the third cell in a formula that divides the difference between cells A and B by cell A. It is the formula for growth. The formula, Cell C, is hard-coded into the model. Cells A and B are input cells that the user can modify.
In this case, the model's goal is to forecast sales growth if a specific action is taken or a potential event occurs.
Of course, this is just one example of financial modeling in action. Finally, a stock analyst is looking for potential growth. Any factor that influences or may influence growth can be modeled.
Comparisons between companies are also significant when deciding on a stock. Multiple models assist an investor in choosing between various competitors in an industry.
Financial Modeling Software
You'll need subscription and customer data to build a valuable financial model. Baremetrics is an analytics platform that generates unrivaled subscription intelligence as well as beautiful data visualizations that provide critical information for your financial models.
You can manually enter data or export data from a billing system or Microsoft Excel. Baremetrics even has a Google Sheets add-on that pulls data directly from your Baremetrics platform!
Oracle BI is a business intelligence platform that converts financial data into useful data sets for analytics. Create financial models that predict the future commercial success of your subscription business using this tool.
Quantrix offers one-click financial forecasting to help you plan for the future of your subscription business. Monitor key performance indicators (KPIs) and look for scenarios that could put your company at risk. This financial modeling software can also be used for demand planning and general business intelligence.
Operis is a forecasting platform that creates successful SaaS financial models that have an impact on future budgets and operations. Formula optimization, mapping, workbook comparison, and even debt modeling are among the features of the financial modeling software.
Another forecasting platform that replaces spreadsheets is Hyperion. It includes a versatile modeling system for gaining insights into pricing and financial statements. Hybrid data models, workflow capabilities, and Microsoft Office integration are among the other features.
Business Objects has cutting-edge financial planning capabilities that assist SaaS companies in planning for the future. Business Objects assists you in managing your balance sheet by providing dependable modelers, templates, and add-ins.
IBM Cognos is an AI-powered financial modeling platform with drag-and-drop functionality for increased functionality. Models for risk management and scenario analysis can be created, and data insights can be shared with stakeholders and team members.
If you have enjoyed reading this Blog, TWN recommends you to read our Blog on "How To Establish Yourself As A Financial Analyst!" Click on the Image Below!