Financial Modeling
The financial representation of all or some of the aspects of a company’s future financial performance, based on their previous and current performances in the economy is known as Financial Modeling. In simple words it means creating a complete overall structure of the company’s future performances which may help the investors on deciding whether to invest in the company.
It is a simple mathematical representation of the company’s financial performances, which is used for developing company specific models. This is used for the purpose of understanding futuristic events, their causes, effects and directions regarding the possible alternatives.
The financial model must always forecast the following aspects of the company
- It must be very simple and robust, in the form of a mathematical relation or a graphical representation.
- Focus mainly on the cash flow models; i.e., analyze the inflow and outflow of total monetary value of the company.
- Must specify almost all possible assumptions of future events and conclusions must be drawn to them.
- The risk regarding certain principle or performance of the company must be clearly evaluated.
Uses of a financial model
- It always forecasts the requirement of raw materials and the ways to increment the profit.
- The risks regarding every decision that is made can be predicted.
- The security of the company in the future can be evaluated.
- Helps in immediate financial decision making as the causes, effects and solutions for a situation that occurred, would have been evaluated in the financial model.
