A lot of times medium and large corporate outsource analysts, to make financial models for themselves. In a recent heartening trend, a lot of companies are actually setting up a financial analysis cell in the company itself that can facilitate making financial models as and when required.
But why do you think that a financial model needs to be made in the first place? And how does it look like?
A financial analyst uses financial modeling as a process by which he takes in the available information at hand and constructs financial representation using them pertaining to any one or all of the aspect of the given company.
He takes in information from the various processes and operations of the company before calculating them and then presenting them in such a manner that information is graphically but easily comprehensible and recommendations ate made on such models pertaining to the action plan and the strategy that the company needs to adopt in face of any challenge or even for the ensuing year.
Accurate forecasting is a corporation’s dream come true:
The versatility of a financial model is epic. It can either be constructed to summarize a particular event and the consequence of it on the company per se or it can be general in nature. An example of the former is a model constructed to show the positive benefits that will ensue on the corporation in case a single big investor parks his investment in the company and a classic example of the latter is the model created to project the sales of the company in the current quarter in the face of challenges such as limited cash flow and heightened competition.
A model so drawn can give a wealth of information to the analyst who along with the middle and the top management can come out with strategies to boost sales and curb various limitations.
What are the uses of the financial model?
Some of the most vital business processes warrant financial modeling. Here is a list of the main five processes that a company cannot take a decision without drawing up plans and create models to determine the input and the expected output.
- Business evaluation as a whole including the net worth of all the assets put together as against the net worth of the project undertaken;
- Scenario preparation in case of any strategic planning like a major investment or disinvestment etc;
- Calculating the overall cost of the project in the pipeline;
- Budgeting decisions with regard to the capital and the cash flow from the organization; and
- Allocating resources for the various processes and forecasting profits and sales after deducting the imminent overheads and other costs.
Financial modeling is an indispensable tool in today’s corporate world. It makes decision making quick, easy and empirical. More and more companies are looking at it in a way they did not even acknowledge a few years ago and that we think is a good sign!