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:
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.