types of financial models

Top 10 Types of Financial Models : A Student Must Know

Are you looking to make a career in the Financial Modeling field? If your answer is YES. Then, do you know the basics of Financial Modelling? Or, do you know the types of financial models? No, Don’t Worry! That is why I’m here. 

In this blog, you will get accurate information about the basics and the types of Financial Models. You will also know that how you can learn Financial Modeling. Also, Why should you learn it?

Let’s begin with the definition of the Financial model.

What is Financial Model?

A financial model is a simple tool that creates in MS Word. This tool further uses for predicting financial performance. The prediction is based on the company’s opinions for future and historical performances. And also requires 3 statement model. 

Now, a question arises in mind.

What is the 3 Statement Model?

3 Statement Model includes the Income Statement, Balance Sheet, and cash flow statement. These 3 statement models link into one Financial Model. 3 Statement Model is called as 3 Way Financial Model. 

So, before moving towards the types of Financial Models.

Let’s discuss exactly why Financial Modelling is used for?

Do you know?

If yes, That’s Amazing!

Or if not, I’m mentioning it below.

Different Uses Of Financial Model

Financial models’ outcomes use for decision-making and making financial analyses, whether inside or outside the business. 

Inside the company, executives of Financial Modelling is to decide about: 

  • Budgeting and planning for the forthcoming years. 
  • Building the company naturally. ( For example, entering new markets, opening new stores, etc.)
  • Risk Management
  • Company’s or Assets valuation
  • Allocation of Capital
  • Raising the Capital
See also  Bookkeeping vs Accounting | The Battle of Two Business Terms

Also Read

Now, let’s move to study different types of Financial Models.

What are the different types of Financial Models?

Well, there are various types of Financial Models. But in this blog, I’ll mention the top 10 most common models used in Corporate Finance. 

1. 3 Statement Model

This is the most basic setup for Financial Modeling. In this model, the 3 statements; income Statement, Cash Flow, and Balance Sheet, are all linked with the formulas in EXCEL. 

The motive is to set all the accounts connected with each other. It is essential to understand how to connect the 3 financial statements. The 3 Financial Statement requires a solid foundation of accounting, finance, and Excel Skills.

2. Discounted Cash Flow (DCF) Model

This model relies on the 3 Statement Model. This model helps to value the company based on NPV (Net Present Value). 

The DCF Model takes the cashflow from the 3 Statement Model and make some adjustment wherever needed. And then does the XNPV function in Excel discount the adjustments back to today at the company’s Weighted Average Cost of Capital (WACC). 

The XNPV function uses particular dates that match each flow which is discounted in the series. 

These kinds of financial models are generally used in equity research and other areas of the capital markets. 

3. Merger Model (M&A)

This model is most advanced. This model is used to decide the pro forma growth/dilution of an organization and property. 

It is generally used in a single tab model for each company. The merger is designed as Company A + Company B= Merged co. 

This is most commonly used in investment banking and corporate development. 

4. Initial Public Offering (IPO) Model

Generally this model used by investment bankers and corporate development professionals. They create IPO models in Excel to value their business. 

These financial models examine the firm and make opinions about how much investors are willing to pay for the company. 

See also  Quick Guide on What is the Purpose of Accounting for Students

5. Leveraged Buyout (LBO) Model

It is the most detailed and challenging of all types of Financial Models. 

A Leveraged Buyout is a transaction where a company use dept as the primary cause of payment. These transactions usually happen when a private equity firm borrows as much as it can from the lenders and balances their equity. 

6. Sum Of The Parts models

This type of model design by using various DCF Models and adding them together. This is sometimes difficult for the FP&A department because they have to gather the data from various studies and collect it into a single model. This model is a handy tool for determining the company’s division. 

7. Consolidation Model

This model covers multiple business units and added them into a particular model. Every business system had its price with a consolidation price that sums up the other business totals. Moreover, this model is similar to Sum of the Parts, where division A and division B are joined together, and a new merger worksheet is created. 

8. Budget Model

Professionals use this model in Financial Planning and Analysis (FP&A). The purpose of this model is to get the budget together for the coming years. Budget models are based on monthly and quarterly figures. In contrast, this model heavily focuses on the income statement. 

9. Option Pricing Models

Black-Scholes and Binomial Tree are the types of Option pricing Model. These models are whole based on mathematical formulas. This model generally uses by market makers and security traders looking to turn a profit. 

10. Forecasting Model

This type is also used in financial Pricing & Analysis. The purpose of this model is to make a prediction that compares to the budget model. Sometimes the budget and forecast model is a linked workbook, but sometimes they are separate. 

Now you are familiar with the Different Types of Financial Models. Let’s take a look at How you can learn financial Modelling.

How can you study Financial Modelling?

Practice is the most excellent way to learn anything. It can take time to learn how to build a Financial model. You have to learn it by doing practice. If you read equity research reports, it can help you in practice. It gives you something so that you can compare your results.  

See also  Top 7 Interesting Uses of Accounting That Business Students Must Know

The best way of practice is that take a mature company’s historical finances, build a flat line model for the future, and calculate a net present value per share. 

It is also essential that you should know the concept well. It would help if you took classes from professional Financial Modeling training Courses. 

Why should you learn Financial Modeling?

If you are willing to learn Financial Modelling, you are on the right path. Financial Modeling is hard to learn, but if you took the help of professionals, it becomes easy to understand. Well, there are advantages of learning Financial Modelling below: 

  • It helps you to learn the ability of prediction and business planning.
  • You can learn about business valuation trades.
  • With the help of Financial Modelling, you can analyze mergers, acquisitions, and other corporate development opportunities.
  • You can better understand how business work. 

Do you know the average salary in Financial Modeling worldwide?

The average salary in Financial Modelling is $86,678. 

Conclusion

Though, now you are aware of the concept and the types of Financial Modelling. The most useable model in Finance Modelling is 3 statement Model. This model is most prepared. Moreover, this model is easy to operate. You do not need to change between tabs. There is less risk of mis-linking the formula.

You have made an excellent choice to learn Financial Modeling as there is the best scope of it. It’s not a problem of whether financial modeling is complex or not. It’s about your willingness and confidence to learn new skills. Get the best financial homework help from the experts.

Frequently Asked Questions

Is Financial Modeling complex?

Yes. Financial Modeling is quite tricky for you at the start. But if you take classes from professionals, it becomes easy for you to understand.

How to build a Financial Model?

To create a financial model, you need a piece of good knowledge of accounting fundamentals. You must know what all different accounts mean, how to calculate them, and how they are connected.