Financial Modelling
Objectives of Financial Modelling
Financial modelling is part of the basic component in the study of businesses and is crucial when it comes to forecasting and decision-making. This involves devising a mathematical model that exemplifies the firm's financial performance and then designing various projections on the assumption given. The paper introduces the reader to the purpose of financial modelling and why it has become such an extremely critical tool for businesses, investors, and analysts.
1. Company Performance Forecasting
One of the biggest roles of financial models is to indicate the future outcomes of an entity's financial activity. A set up of a model is done when predicting different revenues, expenses, profits, cash flows, during a fixed span say monthly, quarter, or on year basis.
These projections allow the organizations to be better prepared for future financial conditions, have informed assumptions about future risk factors, and thus better manage their resources. For example, an organization may wish to project future revenues based on historical data and trends within a given market considering macroeconomic circumstances, competition in the marketplace and changes in rules or regulations. Based upon these accurate projections, the organizations can make strategic expansion, cost-reduction, investment, and price as well.
Example:
The retail business may then use financial modelling to determine short-term expansion of sales as based on historical trends, cyclical events, promotions, and the general overall measure of economic performance. It will thus use this to determine optimal inventory, workforce, and capital investments to provide for the following year.
2. Business or Asset Valuation
Often it's the starting point for making the estimate of business value, value of assets or investment. Anyone looking to attract capital, selling any business, need to determine a value for this business. Discounted cash flows, Comparable c