Financial Modelling Techniques

A financial model though is a model restricted to a particular business type, should be in a clear format that is understandable by and for all. A businessman who is unable to make one of this type would definitely fail to understand the exact findings of the model because it would not have taken the real and exact understanding and perceptions of the others and the one that does not do or fulfill this is definitely not considered a good financial model. So what essentially should a financial model have in store for the onlookers?

  • Realistic data based on of course assumptions which are reasonable and productive. Something that is built on unrealistic data and numbers is not worth discussing or spending time with.
  • A model that is presented to the others in a clear term, something that does not confuse them instead, give them a clear idea about what the business expects from presenting this to the others.
  • It is something flexible and is possible to be adapted to the various business situations.

Techniques of the financial model

There are few important financial model techniques and none of these are particular to any specific type of business.

Historic data – the assumptions for a business are generally made based on the historical data and performance. So it is important to arrive at the right numbers which would give a realistic approach to the business and its future perspective. So it is important to gather the right information at the right time. It is fine if your accounts do not tally at the end of the year for you can sit and work on them to find the right and the exact numbers.

Assumptions – as specified above, a financial model is something that is based on assumptions. Now, these assumptions need to be very realistic as they form the inputs or drivers for the future plans and designs of the model of the business.

Color coding – this might look a very simple thing when comes to financial models and plans but it shows up as an important and essential thing when everything is looked up at the same time. Yes in such a situation it becomes important and essential for the business to denote its different plans and models with different colors so that it gives a clear idea about what is what and the best part is you or anybody from outside the business would be able to understand the same at just a glance.