Written By Team CFI

Why companies need Financial Models and where to use them?

From a start-up to blue-chips and multinationals, private enterprises and public, cloud companies and the brick & mortar ones- all use Financial Models for various purposes. These models are used to get through within the company itself, as well as for presentation to external parties like, current and potential, investors and creditors.

Financial Models, in a way, speak up for the existent, real conditions of the firm in a numerical form- a better way to use the data. Using this tool, the companies project a future picture of their performance. This facilitates better decision making in the present.

Financial models are mathematical and full of formulas. The better the flow and presentation, the better are the evaluation done, because the maker and the user may not always be the same person.

Out of many disciplines, where Financial Models are used in a company or any business, here is a broad view to them:

Business planning

With the use of Financial Models, a start-up company, for example, can have a check on its costs, revenues, capital- how to efficiently use what is available, is it enough, whether more is required, etc.

From the very beginning phase of a business to when the company grows on multifold, Financial Models play a crucial role. They encompass what has been done, what is being done and thus help us know what to do.

From petty business actions like maintaining cash flow, production output, etc. to partnering or acquiring a business or taking up a project…Financial Models are involved in every business decision. And they must be.

Financial Models also help companies get hold of their strengths and weaknesses. Creditor’s turnover Ratio, for example. A company may be paying off too quickly or taking much time. Both the cases affect the business’s financial health and reputation externally. A Financial Model may find a balanced ratio.

Raising Capital

Whether or not the company needs more capital, should it prefer debt or equity, what is the cost of raising such capital, how much of the debt-equity ratio should it maintain… All such questions are answered using a Financial Model.

The company will also need an apt, well-maintained business model to present to its investors and creditors. They then match your requirement along with your business plan and see if your company is fit to invest in.

Because these business models configured in Excel sheets, tell all about the company in a storyline.

Business valuation

Financial Models lets a company know its valuation at any given point of time. Because these Excel sheet includes all the important financial statements and calculations. Thus, a true value in numbers is known to the owners and boards as well as to the shareholders and creditors.

Decision making

This is the prime reason why companies use Financial Models. To get into a certain project, to acquire plant or any other company, to make new strategies or change the existing ones and for deciding on many such matters, Financial Models are very handy.

No company would want to make losses or dwindle its goodwill. Even one slightly off beam choice can cost a lot.

Financial Modelling also plays a key role in finance domain like Equity research, investment banking, credit rating, etc. However, all businesses need financial models for some or the other purpose.