What is Financial Modeling and its kind

What is Financial Modeling and its kind

The method of projecting a business’s future free cash flow and discounting it back to its NPV i.e. the net present value using the weighted average cost of capital is known as financial modeling and valuation. Comparable company research and precedent transactions are examples of alternative valuation approaches. Companies are valued for using these strategies for mergers, acquisitions, and capital raising.

There are various types of financial models.

The following is the rundown of the top 10 Common kinds of Financial models:

  1. Three Statement Model
  2. Discounted Cash Flow (DCF) Model
  3. Merger Model (M&A)
  4. Initial Public Offering (IPO) Model
  5. Leveraged Buyout (LBO) Model
  6. Sum of the Parts Model
  7. Consolidation Model
  8. Budget Model
  9. Forecasting Model
  10. Option Pricing Model

Is it possible to learn financial modeling on your own?

Financial modeling can be learned without a structured course framework, but it will take more effort and time than taking a class. To become an expert in financial modeling, you’ll need to master the following abilities:

Advanced Excel skills: Because Excel is the primary tool for financial modeling, you’ll need a thorough understanding of how to use Excel shortcuts and develop formulas.

Accounting and business knowledge: You’ll need to know how to make a profit and loss statement, a balance sheet, and a cash flow statement, among other things.

Data requirement: Different types of financial models require slightly different data to reach somewhat different outputs. However, certain sorts of data are frequently used in financial models. These are some of them:

  • Income statements and balance sheets are two types of financial statements.
  • Statements of cash flow / discounted cash flow (DCF) analysis
  • Figures and assumptions from the past
  • Analysis of Sensitivity

Models are frequently stress-tested and audited to verify that they are fit for purpose in a variety of scenarios and conditions.

There are a plethora of financial models to choose from. They do, however, fall into the following categories:

Models for project financing

When starting a new project, you must determine whether the possible benefits outweigh the potential hazards. A new startup, a new product line, or expanding into a new area or market are examples of projects. Project finance models can assist in determining the viability of a project.

Models of mergers and acquisitions

To estimate the benefits and dangers of buying out or merging with another company, extensive modelling is required. M&A / merger models, leveraged buyout (LBO) models, and consolidation models are all used to assist businesses in making educated merger and acquisition decisions.

Models for reporting and integrated financial statements

Three types of financial statements are combined in these “three-way” financial models:

  • Financial statement
  • Statement of Cash Flow
  • Statement of Profit and Loss

These are utilised to obtain a complete view of the company’s financial situation.

Models of pricing

A product’s or service’s pricing is critical to its selling proposition and profitability. As a result, financial models are frequently used to determine new and existing product revenue and profit.