Why is Financial Model Important?Introduction
A financial model is a process of building an abstract representation that defines the relationship between various financial goods and services as well as risk connected to them. It helps people to understand how a business will perform under different circumstances by simulating different scenarios and estimating the outcomes. When creating a financial model, it is important to make sure that the assumptions are reliable so that you can use the model for making decisions. The most common way to use a financial model is to raise capital by acquiring debt or equity. The main goal of using such models is to ensure full transparency in operations and show lenders and investors how their money will be used.
What is a financial model?
A financial model is a numerical representation of a business's vision and strategy. It has many uses, but one of the more common purposes is to project how much money you can expect to earn in the future based on certain assumptions. The goal of a financial model is to understand how your business will perform under different circumstances. For example: If I open up a new restaurant and decide to offer delivery service, how will this change my customer base? Or what if I raise my prices by 20%? Will customers still be willing to pay for my product or service?
What is an Excel Model?
An Excel spreadsheet (or other software program) that contains all the necessary information needed for you as an entrepreneur or investor in order for them to make decisions about whether or not they want invest their hard earned money into your company.
Why is a financial model important?
Financial modelling is important because it is a tool for decision making, planning, risk management and forecasting. This means that your financial model will help you in all the things you need to do when running your business.
Financial modelling helps you to:
Decide whether to invest in a project or not based on its financial return
Make sure that your budget matches with reality and make changes if necessary
Evaluate feasibility of various projects / deals before committing resources
Predict the financial impact of possible future events (e.g., sales growth)
How to create a financial model?
Use a financial modelling software. The most popular program is Excel. It’s not bad, but it has some limitations and you may find yourself needing to get more advanced than it allows you to be.
Use a financial modelling tool. These are specialized programs that make the process of building models easier and faster by automating certain tasks like data entry and calculations
Use a financial modelling platform. This is basically a combination of an application and its database (or APIs), which makes it possible for users to create their own models without programming skills or knowledge about the underlying programming languages used by those tools