A financial model is a tool that’s built to forecast a business’ financial performance into the future. The forecast is based on the company’s historical performance and requires preparing an income statement, balance sheet, cash flow statement and supporting schedules (known as a 3 statement model). From there, more advanced types of models can be built such as discounted cash flow analysis (DCF model), leveraged-buyout, mergers and acquisitions, and sensitivity analysis.
What is a financial model used for?
The output of a financial model is used for decision making and performing financial analysis, whether inside or outside of the company. Financial models are used in:
- Historical analysis of a company
- Projecting a company’s financial performance
- Project finance
- Real estate investments
- Oil & Gas projects
- Banks & Financial Institutions
- Personal finances
- Non-profit organizations
- Investment banking
- Equity research
- Users of Financial Models
Types of Financial Models
There are different financial models that you can use as per the need.
- Discounted Cash Flow model
- Comparative Company Analysis model
- Sum-of-the-parts model
- Leveraged Buy Out (LBO) model
- Merger & Acquisition (M&A) model
- Industry-specific financial model
- Option pricing model
- Corporate finance models
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