What is a Financial Model?
Posted: Mon Jan 20, 2025 7:17 am
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What is a Financial Model?
A financial model is an abstraction in every sense. It is an intellectual effort that involves fully understanding a business , an economic phenomenon, in order to capture in mathematical, algebraic, cause-effect terms the most relevant aspects of said business.
Normally, the medium used to capture the information obtained is spreadsheets.
These financial models can be used for many applications, as well as classified into various categories. However, today we will focus on the more mundane ones, those that have more immediate ig database in the field of SMEs, the so-called Financial Models, Financial Planning, Financial Simulation or better known as Financial Projections.
The methodology is actually very simple, the way of capturing the data, the information obtained, the business rules that have been obtained from the analysis, are the basis from which we will start to begin our work.
But what are they for?
It is used to value companies, analyze the profitability of a company's business units, assess the profitability of an investment project or make investment decisions, among others.
Learning the methodology also helps you to have clarity in other types of work, in addition to helping you polish your skills with spreadsheets and/or databases. It also teaches you to respect the profession of Public Accountant, because you begin to appreciate the beauty of the Regulations and Accounting Principles… sorry, but I do find beauty in their reasoning; sorry again, I am in love with my profession.
I have been asked many times how to know if the financial model is correctly conceived or not. If its results are reliable or not. The answer often surprises our clients, although not the accountants. At least not the most experienced ones; here is the answer: the “balance” of the projected statement of financial position and the subsequent “balance” of the cash flow planning. If your model does not comply, I am sorry to tell you that it is not a model…
Myths and realities
“A financial model is a senior management tool”
Yes, it is, but it is not exclusive to large companies. I believe that SMEs are the most benefited since it provides them with a tool or instrument for long-term planning.
“Use high technology.”
Well, yes, if you consider Microsoft® Excel® a high-tech tool. The best models I have seen in my opinion are those developed in Excel® without using programming or anything else. They are “pure”, they do not need anything else , since the current spreadsheet is powerful enough and has the necessary tools to not need additional programming. Personally, I consider it arrogant that you have to program something that Excel cannot do. But that is my opinion.
What is a Financial Model?
A financial model is an abstraction in every sense. It is an intellectual effort that involves fully understanding a business , an economic phenomenon, in order to capture in mathematical, algebraic, cause-effect terms the most relevant aspects of said business.
Normally, the medium used to capture the information obtained is spreadsheets.
These financial models can be used for many applications, as well as classified into various categories. However, today we will focus on the more mundane ones, those that have more immediate ig database in the field of SMEs, the so-called Financial Models, Financial Planning, Financial Simulation or better known as Financial Projections.
The methodology is actually very simple, the way of capturing the data, the information obtained, the business rules that have been obtained from the analysis, are the basis from which we will start to begin our work.
But what are they for?
It is used to value companies, analyze the profitability of a company's business units, assess the profitability of an investment project or make investment decisions, among others.
Learning the methodology also helps you to have clarity in other types of work, in addition to helping you polish your skills with spreadsheets and/or databases. It also teaches you to respect the profession of Public Accountant, because you begin to appreciate the beauty of the Regulations and Accounting Principles… sorry, but I do find beauty in their reasoning; sorry again, I am in love with my profession.
I have been asked many times how to know if the financial model is correctly conceived or not. If its results are reliable or not. The answer often surprises our clients, although not the accountants. At least not the most experienced ones; here is the answer: the “balance” of the projected statement of financial position and the subsequent “balance” of the cash flow planning. If your model does not comply, I am sorry to tell you that it is not a model…
Myths and realities
“A financial model is a senior management tool”
Yes, it is, but it is not exclusive to large companies. I believe that SMEs are the most benefited since it provides them with a tool or instrument for long-term planning.
“Use high technology.”
Well, yes, if you consider Microsoft® Excel® a high-tech tool. The best models I have seen in my opinion are those developed in Excel® without using programming or anything else. They are “pure”, they do not need anything else , since the current spreadsheet is powerful enough and has the necessary tools to not need additional programming. Personally, I consider it arrogant that you have to program something that Excel cannot do. But that is my opinion.