Financial Modeling is the task performed by the financial experts by building the abstract representation of the financial decisions while working on the situations. Financial modeling is a mathematical model such as the computer simulation, designed to provide the performance of the financial asset in any form of financial investment.
A financial model is set of assumptions and predictions about the company’s future conditions that drives the projection of revenue, earnings, cash flows and balance sheets.
Financial Modeling is a general term which is completely different for the different users. In Business Schools of the United States, financial modeling means the development of the mathematical model while using the complex algorithms which is associated with the complex algorithms.
Why do we use excel in financial modeling?
Forecasting about the company’s financial future is really difficult and complex task. Every business is unique and it required a different set of assumptions and calculations that are derived from the past records. Microsoft Excel is an inseparable part of Six Sigma as it is most flexible and customizable according to the records and the data. Sometimes software could be too rigid to handle and don’t let you customize your preferences and records according to your requirements.
Objective of Financial Modeling
The major objective of the financial model is to let clients know about the benefit of the foreign investments. It includes the cost of doing business in the target country? what is the breakeven point? What might be the profit if we work in the United States?
The importance of the financial modeling cannot be ignored as financial models are the key elements of the major businesses. Financial model is prepared by the organization to know about the project finance, bidding for a project, evaluating the targets, carrying out the monthly financial planning and conducting the capital structure studies.
Qualitative review is very much necessary to determine the working of the project and there should be an adoption of the logic and the model and it will be appraised by the intended target audience.
Characteristics of Good Financial Model
A good financial model is
- Uses the transparent design and easy to understand
- It is reliable and uses the control check on every level to determine the errors on every level
- It is easy to use as it can be more productive for analysis rather than struggling to produce simple results
- Six Sigma focuses on the key issues so that no one case waste time in development of the unproductive items