What Is Financial Modeling? Why Is It Useful? Is It Only Confined To Company’s Financial Affairs?
First of all, financial modeling is a quantitative analysis which is used to make a decision or a forecast about a project generally in asset pricing model or corporate finance. Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project. In Investment Banking and Financial Research, Financial modeling means forecasting companies financial statements like Balance Sheet, Cash Flows, and Income Statement. These forecasts are in turn used for company valuations and financial analysis. It is always good to cite an example with this. You can illustrate your point in the following manner – Let’s say there are two projects that a company is working on. The company wants to know whether it is prudent to keep on working on two projects or concentrate their full effort on one project. Using financial modeling, you can use various hypothetical factors like return, risk, cash inflow, the cost of running the projects and then come to a forecasting which may help the company to go for the most prudent choice. With respect to Investment Banking, you can talk about the Financial Models that you have prepared. You may refer to examples like Box IPO Model and Alibaba Financial Model Also, note that Financial modeling is useful because it helps companies and individuals make better decisions. Financial modeling is not confined to only company’s financial affairs. It can be used in any area of any department and even in individual cases.
