Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. It is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment. Financial modeling is largely synonymous with financial statement forecasting. This usually involves the preparation of detailed company specific models used for decision making purposes and financial analysis.
The importance of financial modeling
Financial modeling is crucial to business planning and capital markets. Applications include:
- Business valuation, especially discounted cash flow, but including other valuation problems
- Scenario planning and management decision making (“what is”; “what if”; “what has to be done”
- Capital budgeting
- Operating budgets (month, quarterly, annually)
- Cost of capital (i.e. WACC) calculations
- Financial statement Analysis (financial ratios and comparisons)
- Project finance
- Mergers and Acquisitions (i.e. estimating the future performance of combined entities)
Financial modeling is a complex and comprehensive task that many managers don’t have the time or expertise to complete. As a result, many owner-operated businesses operate without financial modeling, hence without a financial forecast, budget, business plan, and an inability to conduct in-depth Financial Analysis. Without financial modeling, companies cannot secure capital, whether it is an equity investment or loan; and managers cannot proactively make effective investment decisions. Financial modeling is both an art and science.
Deep experience in financial modeling
RAK Advisory has built Financial Modeling for dozens of companies for various purposes, including:
- Valuation of licenses for wireless spectrum auctions,
- Quantifying business cases for new business models e.g. Infrastructure-as-a-Service or “Cloud”
- Financial Forecasting for Business Valuation and Equity investment
- Credit Analysis for Lending / borrowing
- Operating and Capital Budgeting
- Performance Metrics for comparability purposes (financial ratios, growth, etc.)
Whether you’re looking to make investment decisions in your operations and need better visibility in your short-term performance in the form of a budget, or a long-term financial forecast for the purposes of securing capital, business valuation, a merger/acquisition or sale; RAK will leverage its 15 years as an investor, lender, and operator to assist you in financial modeling. Don’t run your business on a whim, equip yourself with financial modeling and stay ahead of the game!