Financial Modelling

Financial Modelling with 247

Financial modelling is a technique being used to assist financial planning. In essence, businesses use financial modelling as a tool to reflect financial planning through calculation, measurement, and quantification.

Financial modelling is a summary of a business’s performance, along with specific inputs and assumptions, to help a business predict future financial performance. In other words, using a quantitative approach, financial modelling and valuation helps a company calculate the financial results of an intended decision or policy.

 

There are two basic types of financial models:

  • The 3 statement model is a basic model based on building blocks, the specific blocks are 3 financial statements (income statement, balance sheet, and cash flow statements). The model will connect 3 reports with formulas in Excel to create a financial model with all components linked together, the end result is that the user can recognise the fluctuations of the components in particular and the fluctuations of the organisation in general.
  • The Discounted cash flow (DCF Model) is developed based on a 3-report model (income statement, balance sheet and cash flow statement), but with the specific purpose of focusing on cash flow analysis to calculate Enterprise value. To do that, the DCF model will evaluate the cash flows from the 3-report model, through making adjustments or discounting these future cash flows. Specifically, we use the XNPV function in Excel to discount the current cash flow with the discount rate as the Weighted Average Cost of Capital (WACC) of the business.

Some of the assumptions tested by financial modelling include: growth rates, profit margins, product lines, individual production segments/areas, and refinancing.

The skills and areas used to build financial models include: knowledge of business operations, accounting, corporate finance, and techniques of financial functions and Excel spreadsheets. Modeling is a combination of the above skills to analyse business performance and thereby analyse how a business responds to different economic situations or events.

Financial modelling is a highly technically area of accounting. It is easy to get it wrong or not even know where to start.

You need to know the true future value of your business but there just isn’t the time and money to call in the professionals.

Financial modelling made easy with Accounting 247. With our online tools and industry-specific solutions, your business will get a clear picture of your financial health in less time than ever before.

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