Top Financial Modeling Examples Every Analyst Should Know

Financial models are integral in every business. Whether you’re a startup or a running business, you will be required to create a financial model. Each type of financial model corresponds closely with the business model, ensuring that financial planning and predictions align with the company’s operational strategies. It is highly relevant for you to do this to help forecast your future growth and revenue. Strategic oversight through key financial metrics allows businesses to extract valuable insights that drive informed decision-making and potential investment returns. Company executives and finance professionals rely on financial model examples to ensure accuracy in their financial data modeling.

Understanding capital markets through financial modeling helps businesses gauge the cost of capital and expected rate of return, which is crucial for business valuation. But what types of different financial models should you be going for? Well, this depends on what your requirements are. Financial models are integral to every business. Here, you will learn different financial modeling examples and their components. Each type of financial modeling example corresponds closely with the business model.

The first question you want to address before diving into different types is what financial models are. Essentially, they help you forecast your finances and get future projections to help you run your business in a better way. Financial models are also essential for your business plan, so you want to make sure you’re creating the right one for your business. Doing so will give you a good basis to create budgets for your business and go about allocating resources in an efficient way.

Financial Modeling Examples

Now, let’s get into the details of the financial modeling examples you can create for your business. Each of these depends on what your business requires. So, if you’re looking to create a basic model, then the 3 statement financial model in Excel is a good choice. However, if you’re planning on a merger or another business acquiring yours, you’d want to create a specific model for merger and acquisition. It’s all relevant to what your business needs.

3 Statement Financial Model

The first one, and the most commonly used financial model in Excel, is the 3 statement financial model. It is one of those financial models that almost every business creates for their budgeting and forecasting needs.  It is highly relevant to the business and, as the name suggests, comprises the three basic statements made by a business throughout its course of existence. The three-statement model, encompassing income, balance, and cash flow statements, is pivotal for robust financial forecasting and valuation. The three-statement financial model is fundamental for assessing a company’s financial health through interconnected financial statements—balance sheet, income statement, and cash flow statement. 

Discounted Cash Flow Financial Model

An advanced version of the 3-statement model is the discounted cash flow financial model. Here, you don’t stop at the cash flow statement. Instead, you take a step forward and create a discounted cash flow to understand the business’s present value. It is necessary when it comes to the valuation of the business. Every business needs to know what they will value after a certain period. Therefore, it is important to make the discounted cash flow statement to understand whether your business will generate a positive Net present value (NPV) or not. Understanding future cash flows is crucial, and the discounted cash flow financial model provides a detailed analysis to help evaluate the long-term value of the business. Employing precise mathematical formulas is critical for enhancing the accuracy of financial models, particularly in complex analyses such as revenue forecasts and debt management.

Initial Public Offering (IPO) Model

Financial models in excel are easily tweaked to fit your requirements. No, this doesn’t mean you make changes in the data and gravitate it more towards how you want it to look. Instead, you can add relevant data to fit your business requirements. For instance, in this financial model in Excel, if a business is going public, then the business owners would want to value it beforehand. It is more relevant to stock trading notions and undergoes comparable company analysis, unlike other financial models. So, you will not find this financial model used by every business as it is relevant to only those businesses seeking to go public. Incorporating a valuation model enables businesses to accurately assess their worth, particularly during potential mergers or when preparing for an IPO.

Leveraged Buyout Financial Model

The next model in financial modeling examples is the leveraged financial buyout model. So, how is this different from the others? In this model, you require highly detailed and complicated modeling that isn’t required for every business. You will not find this commonly practiced, as this is mainly limited to being used in investment banking. The leveraged buyout model, designed for complex financing activities, is often utilized by investment bankers to analyze earnings per share and the financial implications of strategic corporate finance decisions. You need to have advanced knowledge of financial modeling to create this model. There are detailed debt schedules and whatnot that you come across here. The best thing to do to create this financial model is to hire a professional CFO service. Doing so will allow you to end up with an authentic LBO financial model in excel. 

Budget Model

Let’s move on to simpler financial modeling examples like the budget model. Budget financial models are necessary for a series of things in a business. The number one reason to create this is to have sound financial planning. Doing so will allow you to understand where to place your funds over the next few years that you run your business. By knowing this beforehand, you will avoid making mistakes that will result in a higher cash burn rate. Instead, you will have modeled all the possible assumptions that will offer you a decent cash burn rate and allow you a positive cash inflow. Your budget model should include a detailed projection of capital expenditures to accurately forecast financial health and investment needs. This model allows for strategic planning, enabling businesses to manage their capital expenditures efficiently and forecast revenues with greater accuracy.

Forecasting Financial Model

We would put budgeting and forecasting together, but they are very different when it comes to the application bit. You create the budget model based on the forecasting one sometimes. Other times, you compare the two to find out the variation in them. So, while they may seem to be talked about interchangeably, they have different jobs associated. In your financial forecasting model in excel, you will add all the relevant assumptions to assist financial planning.

Doing this will allow you to see what you might expect from your business over the next few years that it is operational. Financial analysts leverage this model to prepare for future performance by creating sensitivity tables that examine various real-world financial situations. Accurate financial forecasts enable businesses to plan for future growth, anticipate market trends, and make data-oriented decisions. Forecasting revenues through financial models allows businesses to plan strategic initiatives based on anticipated market share and sales growth.

Option Pricing Model

Another type of financial model is the option pricing model. In this, you will find a variation of two methodologies that include the Black Scholes model and the binomial model. It all sounds very confusing, but you don’t have to do much for them. There are built-in formulas that help you figure out the values and create your option pricing financial model. As the name suggests, this model is mainly related to the pricing of options that include call and put options. Utilizing complicated formulas and financial modeling software, this model helps to calculate the valuation of options, providing essential data for financial planning and investment cash flow analysis.

Each one of the financial modeling examples aids business owners in making informed financial decisions by forecasting future revenues and assessing potential outcomes.

How To Go About Creating A Basic Financial Model In Excel?

There is a range of other financial models that you will find. All of them mainly depend on the needs of a business and its financial goals. But, how do you go about creating one from the basics?  Leveraging a standardized financial model template can streamline the process of creating complex models, ensuring consistency and accuracy. Utilizing standardized financial modeling templates can reduce user error and streamline the creation of complex models. Here, you will understand what you need to create a basic financial model in excel that will help forecast and budget for your business.

Get Access To All Of The Historical Data

One of the main things that you will have to do is get historical data of your business. In case you are a startup and do not have previous data that you can use, you will have to look at the industry data. Doing so will help you come up with plausible assumptions for your business. On the other hand, as an established business, you can easily use the market data available, and all the previously made financial statements. Analyzing historical performance is fundamental to setting the foundation for predictive models, helping businesses establish feasible financial objectives. Utilizing historical financials as a base, financial models can project future performance with greater accuracy, guiding key decisions in capital projects and business expansions.

Build Assumptions For Your Financial Model In Excel

Once you have all your data at hand, you go into creating your assumptions. These are the inputs that you add to your financial model to help you forecast it. So, what would be included in them? You will need to create assumptions such as the revenue growth rate, forecast expenses, and other financial activities of your business. You will also include any potential changes that you might hope to see in your business, such as getting more investment or planning any business expansions.

Start Working On The Income Statement And Balance Sheet

After you have completed your assumptions sheet, you will move on to the financial statements to add all the relevant data. You start with the income statement and then move on to the rest of the financial statements. In the income statement, you consider every assumption relevant to revenue, expenses, financial costs, profits, and more. Moving on, you start with the balance sheet, in which you incorporate all the balance sheet assumptions and then add the retained earnings from the income statement. The use of complex formulas in Excel enhances the robustness of financial models, allowing for detailed scenario analysis and risk assessment.

Create The Cash Flow Statement For Your Financial Model

Next, you get to your cash flow statement, which will be after the first two statements are made. You don’t make any assumptions for the cash flow statement. Instead, you take balance sheet differentials to create this financial statement. To ensure that your cash flow projections represent a close estimate of what your business will actually do in the next years, you will have to make use of sound assumptions for the balance sheet.

Test Your Financial Model In Excel

Finally, test all the financial statements after completing them based on your business requirements. To do this, you can conduct a series of scenarios or sensitivity analyses. Doing so will help figure out whether the financial model in Excel is robust or viable enough or not. It is highly advised that you go ahead and do this to validate your assumptions and see how well your financial model is linked. To ensure robustness, it is advisable to perform a sensitivity analysis on your financial model, which allows you to understand how changes in key assumptions impact financial outcomes.

Preparing A Financial Model In Excel For Your Business

So, who does all the preparation for your financial model? Generally, the chief financial officer you hire will be a part of your financial plan. Therefore, they will be the ones creating the financial model for your business. Since this is such an essential part of your business plan, you want to make sure that you hire a service with the right skills for the job. 

Frequently Asked Questions

What Is Financial Modeling Used For?

Financial modeling is used for forecasting financial performance, evaluating investments, budgeting, strategic planning, and decision-making by projecting future revenues, expenses, and profitability.

What Information Should Be Included in a Financial Model?

A financial model should include historical data, assumptions for future performance, income statements, balance sheets, cash flow statements, key financial metrics, and scenario analyses.

What Types of Businesses Use Financial Modeling?

Startups, corporations, investment banks, private equity firms, and consulting firms across industries like finance, real estate, technology, and healthcare use financial modeling.

Conclusion

In summary, financial modeling is an essential tool for businesses of all sizes to forecast financial performance, evaluate investments, and plan strategically. By incorporating various financial modeling examples such as the 3-statement model, discounted cash flow model, and leveraged buyout model, companies can make informed decisions and optimize their financial health. These models rely on historical data, precise assumptions, and robust analysis to project future outcomes, helping businesses navigate financial complexities and achieve their goals effectively.

We, at Oak Business Consultant, are experienced in providing consultations on such matters. Go ahead and look at how our CFO services can help you with this highly technical and critical success factor. Contact us now to get a free consultation.