Definition
Financial modeling is used by companies to estimate the financial performance of an investment or a project or a business segment. For the evaluation, this process considers various appropriate factors such as growth and risk assumptions and their potential impact. It is used to get a clear and concise picture of all the variables considered in financial forecasting.
Example
Some of the common financial models used by companies are:1. Discounted Cash Flow (DCF) Model2. Initial Public Offering (IPO) Model3. Merger Model (M&A)4. Three-Statement Model5. Leveraged Buyout (LBO) Model6. Consolidation Model7. Sum of the Parts Model8. Forecasting Model9. Budget Model10. Option Pricing Model
Why it matters
Financial modeling requires a detailed analysis of a company's accounting, finance, and business information. Once the data is gathered, the process helps in predicting future financial performance of the company. It is mostly useful in company valuations.