ECONOMIC AND FINANCIAL MODELING

Financial Modeling – A financial model is simply a tool that’s built in Excel to forecast a business’ financial performance into the future.  The forecast is typically based on the company’s historical performance, assumptions about the future, and requires preparing an income statement, balance sheet, cash flow statement, and supporting schedules (known as a 3 statement model).

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. Inside a company, executives will use financial models to make decisions about:

Raising capital (debt and/or equity)

Making acquisitions (businesses and/or assets)

Growing the business organically (e.g., opening new stores, entering new markets, etc.)

Selling or divesting assets and business units

Budgeting and forecasting (planning for the years ahead)

Capital allocation (priority of which projects to invest in)

Valuing a business

Who builds financial models?

There are many different types of professionals who build financial models.  The most common types of career tracks are investment banking, equity research, corporate development, FP&A, and accounting (due diligence, transaction advisory, valuations, etc).