A financial model in excel comes in a lot of variety. But why is this so? Well, every business has a different requirement for which different financial models are built. For instance, one business might require a merger and acquisition model because of the acquisition events soon to take place. Whereas, another business might only need the basic 3 statement financial model for forecasting.
Here, we will take a look at 10 examples of financial modeling that you’ll find various businesses creating. This will help you understand when you need a particular type of financial model in excel. So, let’s get on to the details of these financial model examples.
The first one is perhaps the most basic version of a financial model in excel. You will find almost every business creating this for forecasting purposes. What does it include? Well, it includes the basic financial statements as the name suggests; the income statement, balance sheet, and cash flow statement.
In this, you create schedules and assumptions that will help you predict the results of future years. You will find the 3 statement financial model in excel to be linked throughout. This makes it easier to make any changes to the result of the model. To do this, you will need to ensure that you have an efficient chief financial officer on board.
Next, we have the discounting factor (DCF) model that is primarily used to figure out what the value of your business is. It doesn’t require you to build your model any different than the 3 statement financial model. Instead, it is just a step more after you’re finished completing the 3 statement model.
Using the Net present value (NPV) function, you discount the cash flow you’re generating to the current date. It will help you realize whether your investment will cover your initial outlay and give you a positive NPV. You will find that the use of this model is essential when you wish to figure out where you stand in terms of investing today.
If a business is planning on merging or acquiring another business, then this model comes into play. It helps address a variety of issues and can get quite complex when you start to build this. Since one company buys out another company or two merges together in this situation, you will require a certified CFO to help you with this.
The creation of a financial model in excel for the M&A model is quite a difficult task. Assets, liabilities, cash flow, and every other thing of both the businesses must be considered. Choosing a professional service for this is the best option for any business.
Now, we have a comparable company analysis (CCA) model. Essentially, this is the easier version of a DCF model and it has relatively simpler calculations. As the name suggests, you will find that the model helps you compare your company’s performance to others running in the industry.
Using this model is simple and will help you figure out what the normal financial practice is in an industry. By using the same or similar metrics from companies that are similar to you, you figure out your business value. However, this measurement will not consider the time value of money.
The Sum-of-Parts model is the ideal option for a business that operates on a large-scale. This doesn’t only mean having too many assets to account for. Instead, businesses that have subsidiaries, conglomerates, and whatnot should be using this to make financial modeling easier for themselves.
How does this work? Well, the process of creating a financial model in excel for this type is easy. You are required to value your business depending on your business unit. So, you will not be forecasting or valuing your business as a whole. Instead, you will be focusing on each division and then accumulating it all at the end. This is highly beneficial for larger organizations.
The initial public offering (IPO) model is for the use of investors. Investment bankers create it before they go public so that they can present where the organization will be in the future.
The financial model in excel accounts for an IPO discount that considers changes in the stocks as well. This is highly technical, so you would want a professional to take a look at all the details you require. It also includes a bit of the CCA model to help investors understand how the organization is valued in the market.
We talked about the Some-of-Parts model earlier. The consolidation model links to that only. While the Some-of-Parts model focuses on each business unit, the consolidation model is the amalgamation of all of them. For instance, your financial models in excel for different business units will be shown together in one consolidated financial model.
The consolidation financial model in excel gives you a clear overall picture of your business. So, if you have various divisions running, then you will need to do build this model as well.
Now, we have the financial budgeting model. Essentially, professionals working in the financial planning area create this model. It is used by a variety of businesses to help understand how to create budgets with their financial model in excel.
Most of the work is done on the income statement in this model. Moreover, rather than giving you an annual view, it takes on more of a monthly or quarterly layout. This makes it easier to allocate and create a budget using your financial model in excel.
The option pricing model is mainly related to derivatives. They revolve around two main pricing mechanisms that include Black-Scholes and binomials. It tilts more towards the technical side, so you want to ensure that there’s an experience professional creating this. However, there are built-in formulas for this also in excel, so it’s not impossible to create on your own.
Lastly, we have the forecasting financial model in excel. This helps in the financial planning aspect, and then further aids in the analysis of your financial model. You will find this mostly together with the budget model. Since both of them help in financial planning, you’re most likely to make use of both of them.
You will use your forecasting model and verify whether it falls in line with your budgets. It helps you assess whether your assumptions for the model fit with what you wish to expect.
All in all, creating an effective financial model requires a lot of skill. It doesn’t matter which type you want to build as they all require expertise. So, how can you go about creating a financial model in excel? Well, you can ensure that you have the right CFO service on hand for you to get your work done.
We, at Oak Business Consultant, are specialized in giving consultation on such matters. You should take a look at how our CFO service can help you with this highly technical and critical success factor. Head on to our website, at Oak Business Consultant, and get a free consultation for your business!