Financial model is a tool that is helping business owners to forecast business’ future financial performance. And this projection is based on the previous performance, and future assumptions of the business and requires income statement, balance sheet, cash flow statement. To put it simply, financial model is helping business owners to see business’ likely financial results. Financial models are the mixture of skills that are used to understand the business future performance such as how your business will survive in different economic situations. These models also can be used to estimate the outcome of business strategies and decisions. A financial model consist of:

  • Expectations and drivers
  • Income statement
  • Balance sheet
  • Cash flow statement
  • Associated schedules
  • Valuation
  • Sensitivity analysis
  • Charts and graphs

Where a Financial Model Is Used?

The outcome of financial model is used in business financial analysis as well as decision making process. However there are many other usage of financial model, which include;

  • Funding purposes
  • Making acquisitions
  • Business organic growth
  • Budgeting purposes
  • Allocation of capital

What Are the Types of Financial Models?

Here is a list of the 6 most common types of financial models used in corporate finance by financial modeling experts:

  • 3-Statement Model
  • DCF or Discounted Cash Flow Model
  • Merger Model (M&A)
  • Initial Public Offering (IPO) Model
  • Leveraged Buyout (LBO) Model
  • Consolidation Model
  1. 3-Statement Model

It’s a basic type of financial model using three statements including, income statement, cash flow statements and balance sheet. These all statements are linked with formulas connecting all the financial accounts. The role of income statement in this financial model is showing the business’ profitability consisting of income after deducting different expenses.

  1. Discounted Cash Flow Model (DCF)

This financial model is used to measure the future cash flow of a business project. This model takes the cash flow from the 3-statement model and make some modifications and after formulation discounted them back to the business’ weighted average cost of capital.

  1. Leveraged Buyout Model (LBO)

This model consist of the acquisition of company with substantial amount of borrowed funds. It is the most advanced and detailed type of financial modeling as they create circular references and require cash flow.

  1. Initial Public Offering Model (IPO)

Initial Public Offering Model involves evaluation of comparable business analysis along with the assumption regarding the amount that the investors would be advancing to the business. Additionally, the valuation in this model consist of discount just to make sure that the stock trades well in the secondary market.

  1. Merger & Acquisition Model (M&A)

It is an advanced financial model that is used to assess the document increase/decrease of a merger or acquisition. The objective of this model is to show your clients the impact of the acquisition on acquirer. This is an asset that will be shown on the acquiring company’s balance sheet.

  1. Consolidation Model

This type of model include multiple business units. The consolidation tab on Excel sums up other business’ units. It is based on combining the company’s financial results. The first sheet of model in Excel shows the consolidation summary revealing the business revenues, profits, expenses and other costs.

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Small Business Financing News │ Merchant Advisors | blog
Most Common Types of Business Financial Models and Examples
Most Common Types of Business Financial Models and Examples
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