Financial Modeling
Financial modeling is a process used to determine the financial health and future projections of a business, considering the unique characteristics and objectives of each enterprise.
Our team comprises specialists who excel in financial modeling, ensuring that every model is crafted by experts. We recognize that each business has distinct financial needs and tailor our modeling approach to suit each specific case within corporate finance. Through financial analysis and forecasting, we help businesses effectively manage their finances, plan for future investments, and make informed decisions that align with their strategic goals.
What is financial model used for?
A financial model is one of decision-making tools used to analyze and forecast a company’s financial situation in the future, primarily for securing financing, valuation, investments, and assessing business risk. Usually financial models in excel are the most efficient ones and allow finance professionals to conduct a business valuation based on them, especially conducting Company Valuation Using the Income Approach.
Financial model is built to allow effective financial management, including planning, control, and decision-making regarding investments, financing, and other financial aspects. A practical financial model needs set of assumptions, accurate financial data and a known purpose of the model. All of it combined with financial modeling skills end in a functional model.
One of the key objectives of a financial model is to evaluate the company’s prospects. It enables accurate estimation of future revenues, costs, and profits, as well as the prediction of trends within the company that could impact its financial situation. These forecasts enable the company to make informed decisions about investments, expansion, development, or the broadening of its product or service offerings. We prepare a dedicated financial model and business plan for both individual investments and the entire enterprise.
Preparing financial statement forecasts for the investment/loan period
How much am I going to earn?
Preparing financial statement forecasts for the investment/loan period
A financial model is used to predict a company’s future financial outcomes. Preparing financial statement forecasts for a specific period (e.g., 5 years) allows the company to prepare action plans (business plan) necessary to achieve the set goals. For example, if the company wants to launch a new project, it may need a loan. A financial model allows for the preparation of a forecast to determine if the company will be able to repay the loan from the operational profits generated by the project.
Support | advisory in creating a business model
Is my approach efficient?
A financial model is a part of the business model and helps in its creation. It supports the analysis of various factors affecting the company’s financial situation, including the profitability of investments for the investor. For instance, when a company plans to expand its operations with a new product line, the model will help estimate costs, sales forecasts, and profits that can be generated by the new product line.
Return on capital planning | business plan of the enterprise
Will this project bring profits?
A financial model allows for the evaluation of the projected business model in terms of providing an adequate return on capital for the investor. In the case of planning an investment in new technology, it helps estimate investment costs and forecast profits that can be generated by the new technology. This enables the company to assess whether the investment will be profitable and provide an adequate return, including the required level of return on working assets.
Tool for estimating financial needs | enterprise finance
How much money do I need to get it done?
A financial model allows for estimating the future financial needs of the enterprise. This enables the planning of funding sources and the avoidance of liquidity problems. For example, when a company plans to expand into new markets, it helps estimate the costs associated with expansion and the financial needs that will be involved.
Modeling the optimal financing structure | optimization of business decisions
Is this the most efficient way?
A financial model allows for determining the optimal financing structure of the enterprise. It helps analyze various financing sources and choose the best solution, for example, when financing is needed for investments.
Your goals and needs guide the direction of our collaboration.
Our approach to financial modeling
Get to know our guide to financial modeling
Define the purpose of the financial model
Collect the necessary data
Determine the structure of the model
Create the Balance Sheet
Create the Income Statement
Create the Cash Flow Statement
Introduce dependencies between the Income Statement, Cash Flow Statement,
Create business scenarios from pessimistic to optimistic
Validate the model
Analyze the accuracy of the obtained results
Create an analysis report
The financial model includes key elements such as:
- Forecast of investment expenditures
- Forecast of external financing requirements
- Forecast of net working capital
- Forecast of the balance sheet, income statement, cash flow statement
- Sensitivity analysis
Different types of financial models
There are different types of financial models, each created to meet certain goals and expectations.
| Type of Financial Model | Description |
|---|---|
|
3-Statement Model |
Projects a company’s financial future using historical data, industry insights, and management guidance. Generates comprehensive income statements, balance sheets, and cash flow statements. |
|
Discounted Cash Flow (DCF) Model |
Estimates a company’s intrinsic value by projecting future free cash flows and discounting them to present value, determining the implied enterprise value. |
|
Merger Model (Accretion/Dilution Analysis) |
Evaluates the impact of mergers or acquisitions on the acquirer’s earnings per share (EPS), categorizing deals as accretive or dilutive. |
|
Leveraged Buyout (LBO) Model |
Helps private equity firms determine the maximum purchase price for acquisitions funded largely by debt, focusing on metrics like internal rate of return (IRR) and multiple on invested capital (MOIC). |
|
Comparable Company Analysis (Trading Comps) |
Provides relative valuations based on industry peers, estimating the target company’s value by analyzing valuation multiples of comparable companies |
|
Precedent Transactions Model (Transaction Comps) |
Similar to trading comps, this model estimates the value of a company based on the purchase prices paid by investors in recent M&A transactions. |
|
Restructuring Model |
Assesses the value of distressed companies by comparing going concern valuations with liquidation values. |
|
Capital Investment Model |
Aids corporations in evaluating the economic viability of projects, using metrics such as net present value (NPV) and internal rate of return (IRR) to guide long-term strategic plans |
|
Lender Credit Model |
Evaluates a borrower’s credit risk to determine appropriate debt financing, sizing, and terms based on the borrower’s risk profile. |
Stages of building financial models - best practices
The principles of creating financial models are crucial for the effective use of these tools in business management.
The model should encompass significant aspects of the company’s operations, both present and future, reflecting the entire business activity and considering both its current situation and future business goals. For example, if a company plans to launch a new business line, the financial model should account for the costs and revenues associated with this investment.
The time horizon should span several years, allowing the company to identify potential financial issues early and take appropriate corrective actions.
The base period of the financial model should be one month, as this enables precise monitoring of monthly costs and revenues and allows for accurate monthly performance comparisons.
The model should generate a balance sheet, income statement, and cash flow statement, as these documents are essential for monitoring the company’s financial situation.
It should operate dynamically, allowing for the adjustment of assumptions to adapt the model to changing market conditions. For instance, if there are changes in tax regulations or raw material costs, the financial model should be able to incorporate these changes for more accurate forecasting.
It should consider dependencies and trends in historical operations, leading to more accurate forecasts. For example, if a company consistently experiences increased sales during the holiday season, the financial model should incorporate this trend in its forecasts. This could mean projecting higher sales revenues during the holiday period, as well as increased costs related to hiring additional staff, purchasing more raw materials, or other operational expenditures.
Creating a financial model requires consideration of many factors, including the business model structure, the objectives of the projected model, and assumptions regarding forecast categories. Financial models are useful in various areas, such as evaluating future prospects, estimating the company’s financial needs, and determining the optimal financing structure. Creating financial models requires an appropriate approach and tools, and models should consider both current and future significant aspects of the company’s operations.
How to use financial modeling in corporate valuation
Financial modeling is a critical tool in corporate valuation, enabling analysts to estimate a company’s worth by constructing detailed financial projections and scenarios. By using financial models, such as the Discounted Cash Flow (DCF) model, analysts can project future cash flows and discount them to present value, determining the intrinsic value of the company. Additionally, models like Comparable Company Analysis (trading comps) and Precedent Transactions (transaction comps) provide relative valuations by comparing the target company to similar firms or recent acquisition prices in the market, to provide a company valuation using the market approach These models incorporate various financial statements, including income statements, balance sheets, and cash flow statements, to simulate different business conditions and assess the impact on the company’s value. Balance sheet is used in company valuation using the asset-based approach. Through sensitivity analysis, financial modeling also allows for the examination of how changes in key assumptions, such as growth rates or discount rates, affect the overall valuation, helping businesses and investors make informed decisions. To get to know more about corporate valuation see our article: Company Valuation Methods—Complete List and Guide
FAQs in financial modeling
The cost of preparing a financial model can vary and depends on many factors, such as the complexity of the model, the scope of work, the time required, the experience of the firm, location, specialization, and many other factors.
Prices for creating a financial model can be based on hourly rates or set as a fixed fee for the entire project. Costs can also vary depending on the size of the company, industry, level of technological advancement of the model, and specific client requirements.
Generally, the cost of preparing a financial model can range from a few hundred to several tens of thousands of euros, or even more for more complex and advanced models. It is important to agree on the scope of work, prices, and terms of cooperation with the chosen firm before starting the project to avoid misunderstandings and unexpected costs.
Financial modeling is the process of creating a mathematical or numerical model that reflects cash flows, financial performance, and the value of a business under various business scenarios. Financial modeling uses various tools and techniques, such as spreadsheets, simulation programs, statistics, sensitivity analysis, risk analysis, and other mathematical methods.
According to E. Bodmer, there are several types of financial models used in various business areas.
Corporate Model
The Corporate Model is a financial model of an enterprise used to evaluate the financial prospects of the entire company. It is based on projected financial results such as revenues, costs, profits, cash flows, etc. This model is used for making decisions related to business management, such as business development, restructuring, or investments. It is applied in aspects like assessing the company’s creditworthiness before granting a loan, forecasting the company’s cash flows for a given period, and analyzing costs and benefits in case of company restructuring.
Project Finance Model
The Project Finance Model is a financial model for a project, used to assess the profitability and risk of specific projects. This model is mainly used in infrastructure and energy projects where project financing depends on its ability to generate cash flows. Therefore, this model is used for transactional purposes.
Acquisition Model
The Acquisition Model is a financial model for acquisition, used to assess the financial prospects of a company planning to acquire another enterprise. This model is based on forecasts of cash flows, costs, and benefits related to the acquisition, as well as an analysis of synergies between the two companies. It is used for aspects such as evaluating the value of a company before acquisition, estimating potential synergies of the combined companies, and analyzing the costs and benefits associated with the acquisition.
Merger Model
The Merger Model is a financial model for mergers, used to evaluate the financial prospects of companies planning to merge. This model is similar to the Acquisition Model but is more complex because it includes the financial analysis of two companies planning to combine.
A business plan is prepared when planning a new development investment, expanding operations, or changing the company’s business profile. A business plan is a tool for analyzing the return on investment for the project, serving both internal needs (management accounting) and external purposes.
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