What is financial modeling and who uses financial models?

What is Financial Modeling?

The term “Financial Modeling” encompasses anything related to finance on excel. A financial model is a living and breathing calculation with multiple historical financial values, mixed with prospective inputs to get you to any answer the analyst is seeking. Using excel you could create a financial budget, forecast a project cost, develop an option pricing model or simply value a company, among nearly anything else. It is all considered “financial modeling” and it only requires the user to identify the project, scope out the inputs/calculations necessary to reach the conclusion and build the model.

 Users and Uses of Financial Models

Financial models can be used by many different parties for many different goals. Investment bankers use models for transactions involving capital structure or ownership, accountants and valuation advisors use financial models for valuation projections, credit analysts use financial models to determine ability to repay debt, buy/sell side research analysts use financial models to determine a buy or sell rating on a particular security and management uses financial models to determine internal budgets for various reasons.