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Types of Financial Modelling
Mar 3, 2020

“Financial models are easy to comprehend when prepared with the right methodology”

  • How will your company run in the future?
  • Are you worried about cash flow management? 
  • How will you manage your business risk cost-effectively?

If such questions keep ringing in your minds, then we have “one answer to all your worries – Financial modeling.”

In simple words, financial modeling can be defined as a process of populating a company’s income and expenses in a spreadsheet to know the financial position of the company. It not only helps in knowing the valuation of a company but also compares businesses in the same industry.

Financial modeling can also be termed as Excel modeling. There are numerous types of financial modeling.

Let us check out the 10 most common types of the financial model -

1. Three Statement Model -

This model is the most fundamental financial model.  The three statements i.e., Balance Sheet, Cash Flow and the income statement all these are linked with formulae in excel. The prime objective is to interlink all the statement with a set of assumptions. These assumptions drive the complete model and all the changes are reflected throughout the model. This model requires a strong base of finance, accounting as well as excel skills.

2. Discounted Cash Flow (DCF) Model -

It is an extension of the three statement model. A company’s value is calculated using the Net Present Value to forecast future cash flow. Using the three statement model, some adjustments are made and then using the NPV function, the company Weighted Average Cost of Capital (WACC) is calculated.

3. Merger Model (M&A) -

M&A type of model is widely used in investment banking. This is an advanced model wherein the evaluation proforma decides the addition/dilution of the merger or acquisition. A single tab model is prepared for every company and the consolidation of Company A + Company B = Merged Company. The complexity level keeps on varying depending on the companies.

4. Initial Public Offering (IPO) Model -

Before going in public, IPO models are prepared in excel to value your businesses. These models are primarily required by corporate development professional and investment bankers. In this model, a comparative company analysis is made parallelly with the assumption of how much money the investors are willing to pay for the company. It also includes an “IPO discount” to ensure stock trading.

5. Leveraged Buyout (LBO) Model -

LBO model also requires advanced financial modeling. All the leveraged buyout transactions need complex debt schedules. This model is one of the most detailed as well as a difficult model. Herein, there many layers of financing inclusive of cash flow waterfalls and circular referencing.

6. Sum of the Parts Model -

Sum of the Parts Model is populated by taking numerous DCF models and then adding together. In case there are any additional factors of the business which are not suitable for the DCF model, for example, marketable securities are further added to the business value.

Please Check out Sum of the Parts Model formula to avoid confusion.

Value of Business A + Value of Business B + Investments – Liabilities = Net Asset Value of the Company.

7. Consolidation Model -

In a consolidation model, several business units are compiled into a single model. Every business units have its individual tab, with a consolidation tab to sum up all the business units together. The exercise is identical to the sum of the parts model wherein Division

A and Division B are added together to create a new consolidated worksheet.

8. Budget Model -

Budget Model is mainly used in financial planning and analysis (FP&A) to forecast the budget for the coming years. These are prepared on a monthly and quarterly basis with a high focus on the income statements.

9. Forecasting Model -

This type of model is also used in financial planning and analysis (FP&A). This is build to forecast and compares the budget model. Depending on the requirements, the budget and forecast model can be combined or separate.

10. Option Pricing Model -

The two most essential types of Option Pricing models are Binomial tree and Black-Sholes. These models are purely mathematical based. These model require a direct calculator-built based models in excel.

Financial modeling is tough.  Why worry when Icrest model is right here with the solution. We can provide you samples of financial models for any type of business. What are you waiting for? 

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