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What are the Types of Financial Models?

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Every business should incorporate financial modelling into its business intelligence and analytics strategy. Using software like excel, businesses may develop dynamic models that users can relate to crucial financial records like income statements, balance sheets, complex debt obligations, and more.

Here are 10 various types of financial models are something you should be aware of. With the use of these models, some basic corporate finance knowledge, and practical templates, you may model your company's financial needs and create long-term strategies.

Three Statements Model 

The most fundamental framework for financial modelling is the three-statement model. The three statements—income statement, balance sheet, and cash flow—are all dynamically linked together using Excel formulas, as the name suggests. The goal is to put it up so that all the accounts are interconnected and that changes in one assumption can affect the entire model. The three financial statements must be connected, which needs a strong foundation in accounting, finance, and Excel skills. In our online financial modelling courses, you may learn the basics.

Discounted Cash Flows Model(DCF)

The DCF model extends the three-statement model to determine a company's value based on the Net Present Value (NPV) of its anticipated future cash flows. The DCF model uses Excel's XNPV function to discount the three-statement model's cash flows to today at the company's weighted average cost of capital after making any necessary modifications to the cash flows (WACC).

Equity research and other segments of the capital markets employ these kinds of financial models.

Merger Model (M&A)

A more sophisticated model used to assess the pro forma accretion/dilution of a merger or acquisition is the M&A model. One tab is frequently used for each company, with the formula Company A + Company B = Merged Co. There are many different complexity levels. The most typical applications of this paradigm are in business development and/or investment banking.

Initial Public Offerings Model  (IPOs)

Excel-based IPO models are also created by investment bankers and corporate development specialists to value businesses before going public. These models make an assumption about how much investors would be prepared to pay for the company under consideration while also analysing similar companies. To guarantee that the stock trades favourably on the secondary market, the valuation in an IPO model incorporates "an IPO discount."

 Leveraged Buyouts Model(LBO)

Advanced financial modelling is often required for a leveraged buyout deal because it involves complex debt schedules. Given the numerous layers of funding and need for cash flow waterfalls, an LBO's financial model is frequently one of the most intricate and difficult of all types of financial models. Outside of investment banking or private equity, these approaches are not particularly frequent.

Sum of the Parts Model

To build this kind of model, many DCF models are blended. Any other factors that might not be suitable for a DCF analysis, such as marketable securities that would be valued in accordance with the market, are then included in the business valuation. The value of Business Unit A, Business Unit B, and Investments C, less Liabilities D, would be added together (hence, "sum of the components") to calculate the Company's Net Asset Worth.

Consolidation Model

Multiple business units are combined into one model in this form. Each business unit typically has its own tab, and the consolidation tab just adds up all the other business units. Division A and Division B are combined together in a similar manner to a Sum of the Parts exercise in order to create a single, consolidated worksheet.

Budget model

For the purpose of creating the budget for the upcoming year, this is utilised as a financial modelling tool by specialists in financial planning and analysis (FP&A) (s). Most budget models are created to be based on monthly or quarterly data and give the income statement a lot of attention.

Forecasting Model

FP&A (financial planning and analysis) also employs this kind to provide forecasts that contrast with budget models. Both the budget and the forecast models can be found in one spreadsheet at different times.

Option Pricing Model

Binomial trees and Black-Scholes models are the two primary categories of option pricing models. These models are more or less a simple calculator included in Excel because they are simply based on mathematical formulas rather than subjective judgements.

The financial and operational history of a corporation serves as the basis for financial modelling. The financial models offer information and statistics for planning the future, estimating income, and projecting expenses. These are the most important and top Financial Models.

I hope this blog would be a help in clearing your doubts on this subject.

By-Vandana Gaur



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