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What Is A Financial Model

A financial model is an Excel-based tool that projects a business's financial performance using historical data and assumptions. Its main purposes include evaluating performance, forecasting financials, supporting investment decisions, and determining business valuation. Common types of financial models include the 3-statement model, budget model, forecasting model, valuation model, and scenario analysis.

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8 views2 pages

What Is A Financial Model

A financial model is an Excel-based tool that projects a business's financial performance using historical data and assumptions. Its main purposes include evaluating performance, forecasting financials, supporting investment decisions, and determining business valuation. Common types of financial models include the 3-statement model, budget model, forecasting model, valuation model, and scenario analysis.

Uploaded by

Thanasia Co
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is a Financial Model?

A financial model is a tool built in Excel (or similar software) that represents
a business’s financial performance. It uses historical data, assumptions, and
formulas to project future performance—like revenues, expenses, profits, and
cash flows.
Think of it as a "financial calculator" that helps answer “what if?” questions.

🧩 Main Purposes of a Financial Model:


 🔍 Evaluate a business’s performance
 💸 Forecast revenues and expenses
 🏦 Support loan or investment decisions
 🎯 Help with budgeting and planning
 🧾 Determine business valuation

🧱 Basic Components of a Financial Model

Section Description

Assumptions/
Variables like growth rates, costs, inflation
Input

Income Revenues, COGS, operating expenses, net


Statement income

Balance Sheet Assets, liabilities, and equity

Cash Flow Operating, investing, and financing cash


Statement flows

KPIs/Ratios Profit margin, current ratio, ROA, ROI, etc.

Dashboards/ Visuals to summarize financial


Graphs performance

📘 Common Types of Financial Models


1. 3-Statement Model
Links income statement, balance sheet, and cash flow.
2. Budget Model
Projects income and expenses over time (usually 1 year).
3. Forecasting Model
Projects future results (monthly/quarterly/yearly).
4. Valuation Model
Estimates a company’s value using methods like Discounted Cash Flow
(DCF).
5. Scenario & Sensitivity Analysis
Tests “what if” scenarios by changing variables (e.g., sales drop 10%).

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