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Financial modeling

Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment. Typically, then, financial modeling is understood to mean an exercise in either asset pricing or corporate finance, of a quantitative nature. It is about translating a set of hypotheses about the behavior of markets or agents into numerical predictions. At the same time, "financial modeling" is a general term that means different things to different users; the reference usually relates either to accounting and corporate finance applications or to quantitative finance applications. In corporate finance and the accounting profession, financial modeling typically entails financial statement forecasting; usually the preparation of detailed company-specific models used for decision making purposes and financial analysis. Applications include: Business valuation and stock valuation - especially via discounted cash flow, but including other valuation approaches Scenario planning and management decision making ("what is"; "what if"; "what has to be done") Budgeting: revenue forecasting and analytics; production budgeting; operations budgeting Capital budgeting, including cost of capital (i.e. WACC) calculations Cash flow forecasting; working capital- and treasury management; asset and liability management Financial statement analysis / ratio analysis (including of operating- and finance leases, and R&D) Transaction analytics: M&A, PE, VC, LBO, IPO, Project finance, P3 Credit decisioning: Credit analysis, Consumer credit risk; impairment- and provision-modeling Management accounting: Activity-based costing, Profitability analysis, Cost analysis, Whole-life cost, Managerial risk accounting To generalize as to the nature of these models: firstly, as they are built around financial statements, calculations and outputs are monthly, quarterly or annual; secondly, the inputs take the form of "assumptions", where the analyst specifies the values that will apply in each period for external / global variables (exchange rates, tax percentage, etc.

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