Finance
Financial Modelling- A prac cal view
F ew analysts understand that financial modelling nothing but workings on excel spread sheet. Par
ally
true!
Financial modelling is of building a model which represents real world Financial situa on. This is a
mathema cal model. It is designed to represent the expected performance of a business or project or
business por olio.
Myth and truth a ached with financial modeling
It is only for accoun ng purposes:- There are many accoun ng so ware available globally. These
so ware are just used to see the result. But financial modelling is developed for many purposes such as
corporate finance, asset valua on, project management etc.
It is a standard product:- Many analysts believe that financial modelling is a standard product and can be
used the same model everywhere. But this is not true. Even in the same organiza on different financial
modelling shall be used for different purposes such as valua on, corporate finance, es ma ng risk return
a ached with por olio etc.
It is very easy to develop:- Since the model is a representa on of real world situa on, anything
expected to happen in the real world has to be incorporated in the model to know the impact on the
profitability and wealth. Therefore assessment and forecas ng of data input is very cri cal. Moreover, all
the variable inputs should be considered and level of impact needs to be assessed with proximity.
Small business does not need financial modeling:- financial modeling can be used even for small
businesses including start-ups. For start-ups it is helpful to build out a model to understand all the
variables needed for success. The act of building out the model will bring different expenses, revenue
ideas, and cash flow requirements to the surface.
Same model can be used every me :- NO. as the me passes, business becomes bigger i.e. the internal
variables are going to change. Also, external market dynamics will also shi . Therefore, there is need to
update the mathema cal model.
www.Venture-Care.com/Magazine
October 2017
32