Financial modeling is a technique used to make predictions about financial outcomes. It’s a big math problem where you use data and formulas to make projections about what might happen in the future.
A financial model might be used to help a company decide whether to invest in a new project, or to help a bank decide whether to make a loan to a borrower. The model takes into account various factors, such as the cost of the project, the potential revenue it could generate, and the risks involved.
To build a financial model, you first need to gather data and information about the thing you want to model. This might include things like historical financial statements, market data, and industry trends. You then use this information to create a set of assumptions and formulas that can be used to make predictions.
The most common tool used to build financial models is Microsoft Excel. Excel allows you to create formulas and equations that can be used to analyze and manipulate data. Once you have created a model in Excel, you can use it to run various scenarios and see how changes in different factors might impact the outcome.
Modeling allows you to make informed decisions based on data and projections, and can help you understand the potential risks and rewards of a particular investment or business venture.
Check out what a Discounted Cash Flow (DCF) model looks like at a high-level: DCF Example