Financial model is the knowledge for building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a company or project.
Financial model is crucial for predicting the future of a company or project and become the basis for decision making in regards with planning, investment, lending, acquisition and structuring. Financial models done by investors and analysts worldwide is responsible for the determination of global asset prices and determine the realization of projects in all sectors.
Financial Model for companies and projects commonly consists of several elements:
- Forecast – prediction done on each important assumptions, where the assumptions are predicted through the use of various tools including quantitative techniques.
- Financial Projection – the prediction of future financial statements and condition of the company, developed based on various company assumptions.
- Valuation – determine the value of equity, investment or project. Mostly used by capital market analysts.
- Feasibility – determine whether a project is feasible for development or acquisition. Mostly used by project managers.
- Credit Analysis – determine the repayment capacity of a company or project. Mostly used by credit analysts, especially working in banks and financial institutions.
- Risk Analysis – analyzing the level or risk and sensitivity and the probabilistic nature of a model. Used primarily to control and manage the risk of an investment or project.