Financial modelling is the process of creating a summary of a company’s expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision.
A financial model has many uses for company executives. Financial analysts most often use it to analyse and anticipate how a company’s stock performance might be affected by future events or executive decisions. It is a representation in numbers of some or all aspects of a company’s operations.
Such models are intended to be used as decision-making tools. Company executives might use them to estimate the costs and project the profits of a proposed new project. Financial analysts use them to anticipate the impact of an economic policy change or any other event on a company’s stock.
Financial models are used to estimate the valuation of a business or to compare businesses to their peers in the industry. They also are used in strategic planning to test various scenarios, calculate the cost of new projects, decide on budgets, and allocate corporate resources. Examples of financial models may include discounted cash flow analysis, sensitivity analysis, or in-depth appraisal.