Financial Modeling .December 24, 2020
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.
- Business valuation, especially discounted cash flow, but including other valuation approaches
- Scenario planning and management decision making (“what is”; “what if”; “what has to be done”)
- Capital budgeting, including cost of capital (i.e. WACC) calculations
- Financial statement analysis / ratio analysis (including of operating- and finance leases, and R&D)
- Project finance modeling
- Cash flow forecasting