Logo
Home  >  Glossary  >  Financial model

Financial Model

A financial model is a mathematical representation of a company’s financial performance used to forecast future outcomes. These models are built using financial data and assumptions to simulate how changes in key variables affect a company’s results. Financial models are widely used in decision-making processes, including investment analysis, valuation, and strategic planning. Common types of financial models include discounted cash flow (DCF), sensitivity analysis, and scenario planning.

Example

An investment analyst builds a DCF model to evaluate a company’s potential value by estimating future cash flows and discounting them to present value.

Key points

Uses historical data and assumptions to project future financial performance.

Essential for investment analysis, valuation, and decision-making.

Commonly used models include DCF, sensitivity analysis, and scenario planning.

Quick Answers to Curious Questions

It provides a structured approach to evaluate potential investment returns and risks.

Accurately forecasting variables and dealing with uncertainty can make modeling complex.

They help businesses assess potential outcomes and make informed strategic decisions.
scroll top

Register to our Newsletter to always be updated of our latest news!