Local modeling

What is Financial Modeling? Here is a more detailed overview

When you start a business, how and when you use your finances can be crucial to the vitality of your business. According to the United States Bureau of Labor Statistics, about 20% of small businesses fail in the first year. This is why it is extremely important to obtain financial support from the start.

At GenCap, Alexander Dillon is focused on supporting growing businesses with capital and leadership. A crucial aspect to consider is your financial model. Read on for an explanation of financial modeling and a deeper look at how a strong financial model can benefit your business.

What is Financial Modeling?

A financial model is a quantifiable way to look at a summary of a company’s expenses and revenues. Often in the form of a spreadsheet, a financial model can be used for a variety of reasons, most often to see how a future event or decision will affect business results. Financial models are used in a variety of contexts to look at things like:

  • Risk management
  • Business valuation
  • Asset Valuation
  • Acquisitions and mergers
  • Capital raising
  • Option pricing
  • Budgeting and Forecasting
  • Capital allocation

From this short list, it’s easy to see how much a good financial model can help a business. Financial models are also used by financial analysts to assess and predict stock performance based on various variables.

Learn more about how to understand financial modeling

Financial modeling is all about looking at numbers. What kind of numbers? By examining a company’s past, present, and possible future, financial models help business owners and managers make informed financial decisions. Are you planning to expand your business? A financial model can be beneficial for examining the costs and benefits of expansion.

Not a business owner? Financiers, including investment bankers and data analysts, often use financial models to understand or anticipate the impact of events on stock and company valuations. Changes in stock valuation can come from internal and external forces – from changes in corporate strategy or management to external forces such as changes in laws or regulations that affect a business.

Financial models are also useful when it comes to estimating the value of a business or comparing the value of one business to another within the same industry.

What is financial modeling used for?

A financial model helps people inside or outside the company to make decisions. Whether a financial model is used in an attempt to raise capital, increase the size of a business, sell a business, budget for the future, or value a business, a financial model can be a valuable resource.

Examples of financial models

There is no single financial model for all scenarios. Take a look at a few types of financial models to see how they could benefit your business. It will probably depend on what you are trying to predict.

Discounted cash flow model

A popular valuation method in the world of finance, the discounted cash flow model determines the value of a business by viewing the net present value as the sum of future cash flows discounted to the present value. The “discount factor” is generally determined by looking at the weighted average cost of capital.

The discounted cash flow model helps determine the accuracy of a stock’s value for a given company.

Sensitivity analysis model

A sensitivity analysis model is useful for predicting what will happen to a business under a set of conditions. For example, a specific set of independent variables can have a significant impact on a company’s overall performance. A perfect example is to think about how the cost of raw materials can lead to changes in finished products or services offered to customers and how this should be communicated to your customer base.

Three-State Financial Model

In the traditional three-statement model, accounting looks at the income statement, balance sheet, and cash flow statement to analyze the relationship between the three. By looking at profitability, assets, resources, and liabilities, you can get an accurate picture of an organization’s financial health and make predictions for the future.

What information should be included in a financial model?

The best financial models contain a lot of information. Graphs, tables, and figures accompany items such as income statements, balance sheets, and cash flow statements, as well as timelines, valuations, and more.

What types of businesses benefit from using financial modeling?

There are a wide variety of businesses that benefit from the use of financial modeling. Bankers are an obvious group, especially those involved in trading and sales. Bankers and investment professionals use financial modeling to justify stock sales and purchases, predict future trends, and make recommendations to clients.

Similarly, accountants also use financial modeling. In the accounting world, financial models can help in audits as well as due diligence investigations and valuations.

How do you know a financial model is accurate?

When it comes to financial models, accuracy is imperative. Mistakes and mistakes can be costly. Sometimes financial models are validated by external sources to ensure accuracy.

When trying to make accurate predictions about the future health of a business, you need to know that your financial model is accurate and reliable. Don’t hesitate to seek third-party validation when time and money are at stake. Research indicates that inaccurate financial reporting costs U.S. businesses nearly $8 billion a year.

Alexander Dillon is President and Managing Partner of GenCap Management, a New York-based venture capital/private equity firm focused on deploying capital into high-growth potential public and private companies.

From a University of Maryland graduate to a skilled entrepreneur and investor, Dillon truly loves what he does, using his expertise in private equity, investing and financial modeling to support startups and drive success in all kinds of businesses. He also volunteers with several local charities and opened a restaurant in 2021 with two of his childhood friends.

Written by Alexandre Dillon.
Did you read?
Best CEOs in the world, 2022.
World passport ranking, 2022.
Ranking of international financial centers, 2022.
The richest people in the world (Top billionaires, 2022).
Economic ranking: largest countries by GDP, 2022.
Most populous countries and territories, 2022.
Top Citizenship and Residency Programs by Investment, 2022.

Follow the latest news live on CEOWORLD magazine and get news updates from the United States and around the world. The opinions expressed are those of the author and not necessarily those of CEOWORLD magazine.

Follow the headlines from CEOWORLD magazine on: Google News, LinkedIn, Twitterand Facebook.
Thank you for supporting our journalism. Subscribe here.

For media inquiries, please contact: info@ceoworld.biz