When it comes to financial modeling, a lot of persistent and repetitive questions are asked regarding the topic. The questions range from what is a financial model? how to build a financial model? to how does it help in making investments and other financial decisions? It is important to understand what financial modeling is before venturing into the more complicated parts of the topic.

What is Financial Modeling?

According to Invesopedia, financial modeling is the process by which some business firm constructs a representation of some or all aspects of the firm. The model is structured by making calculations and adding recommendations based on that given information. The model also has its uses in summarizing the particular events for the end users as well as providing directions regarding possible courses of action or alternatives within the financial scheme.

So to put it simply, financial modeling involves building financial models, sometimes from the very foundations and at other times by simply maintaining and updating the existing financial models of the firm. It is a skill to both build and maintain a financial model and requires training and practice.

Financial model is crucial to business firms because they are used to calculate, estimate and forecast financial numbers regarding investments and other monetary issues in the firm. Financial models can therefore range from simple formulas to complicated computer programs that may take hours to work on. In short, “financial models are mathematical models in which the variables are all linked together” Moneyterms. A certain amount of skill in programming and operating MS Excel is required in order to build and maintain financial models.

Where Can Financial Models be Used?

     * Projection of a company's financial performance

     * Personal Finance

     * Investments in Real Estate

     * Historical Analysis of a Company

     * Project Finance

     * Banks and Other Financial Institutions

     * Non Profit Organizations or NGOs

     * Government Facilities

     * Oil and Gas Projects

     * Equity Search

     * Investment Banking

Users of Financial Model

     * Finance and Accounting Experts

     * Entrepreneurs and Business Owners

     * Individuals for Uses in Personal Finance

     *   Financial Consultants and Modelers

The Areas Where Financial Model is Used

     * Valuation of a Financial Security

     * Checking the Size of Market and Opportunities

     * Forecasting Future Needs for Raw Materials

     * Benefits of a Merger

     * Check the Probability of Profit

     * Predict Risks and Ascertain Quantity

     * Check Required Amount of Investment

     * Identify Undervalued Security Codes

     * Gauge Portfolio Performance

But in all these areas there is a possibility that different types of financial models are used because of the various requirements of these different areas. So there are different types of financial models suited to the different requirements.

Types of Financial Models

     * Comparative Company Analysis Model

     * LBO (Leveraged Buy Out) Model

     * Discounted Cash Flow Model

     * Option Pricing Model

     * M and A (Merger and Acquisition) Model

     * Corporate Finance Model

Your models should be simple, easy to understand and flexible enough for changes and updates. Management of time is a key aspect of Financial Modeling. Your financial model should be structured so that you can take decisions directly based on the model that will consequently impact your firm. So Excel helps you in all these processes of Financial Modeling.