Question

how to use financial modeling in finance? what is its role in company worth?

Answer 1

A financial model is essentially an instrument that is characteristic spreadsheet programming, for instance, MS Excel to assess a business' financial performance into what's to come and expect.

The forecast is established typically based on the company’s historical performance, assumptions about the future, and requires preparing an income statement, balance sheet, Cash flow statement,

Starting there, further models can be built, for instance, Discounted Cash Flow analysis (DCF model), leveraged-buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis

The output of a financial model is used for performing financial analysis and decision making. Executives make use of Financial models to make decisions which are internal to company such as

· Raising debt / equity capital

· Acquiring businesses and/or assets

· Opening new stores, entering new markets for growing businesses organically

· Selling or divesting assets and business units

· Budgeting and forecasting

· Capital allocation

· Valuing a business

· Financial statement analysis/ratio analysis

· Management accounting

Financial Modeling is used at various aspects of a business such as

Investment Banking / Equity Research:

Financial Modeling is the essential tool for Fundamental analysis and valuations. Investment Banker use it to show up at a valuation in M&A or raising transactions. Equity Analysts use it to esteem stocks and arrive at buy/sell/hold suggestions.

Project Finance/Credit Rating:

Financial model helps bankers, credit analysts to project future revenues and costs and to make an informed judgment about a projects viability. They are then able to decide if they should extend loans or what the credit rating of a project or company should be.

Corporate Finance:

Financial Modeling is used by companies to assess their own finances and projects. It is hence an input in creating funding plans for corporate projects.

Entrepreneurs/Private Equity:

Entrepreneurs use Financial Models to present their plans to potential investors as much as to plan their strategies. Running different simulations can often be an important tool in avoiding potential risks