Financial modelling is the task of building an abstract representation or model of a real-world financial situation. This mathematical model is designed to represent a (somewhat simplified) version of the performance of a financial asset or project or operating segment of the business. The model would focus on making predictions of future performance based on past and present data and trend analysis. The model will thus serve as a planning tool that assists management to cope with future challenges, uncertainties, opportunities, and growth.
Typically, financial modelling is an exercise in either asset pricing or corporate finance, of a quantitative nature. It is about translating a set of hypotheses about the behaviour of markets or agents into numerical predictions. It entails financial statement forecasting, financial analysis, and the preparation of a detailed company-specific model for decision-making purposes. Assumptions based on managements’ experience, knowledge, and judgement are combined with a selected technique to project future results. A sensitivity analysis challenges possible errors in those assumptions about parameters applied to company-specific variables.
Applications of the model that you could utilise include:
The output of a financial model is used for decision making and performing financial analysis. Key variables can be adjusted within the model to better understand the impact of certain decisions - this allows for a wide scope in scenario planning, as well as best/worst case scenarios (and everything in between).
Our process would unfold as follows:
The model will be constructed in such a way as to provide nuanced, granular detail as needed, but more importantly, to provide a “big picture” view of the business, with a focus on providing simple yet potent insights into the inner workings of the business. This will be achieved by supplementing “the numbers” with visual representations of the data in the form of graphs and charts which can be easily and intuitively grasped by the decision-making team of the business.
Overall, the goal is to reflect the business’ strategy in numbers: what the current analysis tells us and what these figures could suggest regarding improvements in efficiency and strategy moving forward, highlighting key metrics and indicators which drive the overall vitality and health of the business.
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