What is Financial Modelling: Process, Types, Techniques
Subham Sahoo24 Sept, 2025Share
Financial Modelling is a method used to understand money matters. It helps to see how a company, project, or idea may perform in the future. It works like a map that shows the possible direction of money. Financial models guide companies and corporations in making money decisions.
Money plays a very important role in our lives. Families plan their expenses, students save for books, and businesses plan for their future growth. In every case, planning is needed. Good planning helps us use money wisely. One of the primary tools for this is called financial modelling.
What is Financial Modelling?
Financial modelling is the process of building a structured model of money and its movement. Businesses need to build proper financial models to accurately predict their future profits, margins, risks, and returns. Some of the important facts related to Financial Modelling are as follows:
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A Financial Model can be built by integrating numbers, data, and assumptions. This model shows how money will move in the future.
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Financial models are often made using tools like spreadsheets. These spreadsheets have rows and columns where numbers can be placed. With formulas, the computer calculates results quickly. This saves time and reduces mistakes.
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Financial modelling helps people make better choices about money. It reduces risks and shows possible outcomes before making big decisions.
What is Financial Modelling Process
The process of financial modelling means the steps taken to build a model. Just like building a toy car requires steps like fixing wheels, painting, and testing, building a financial model also needs steps. The process requires patience and care. A good model is like a strong bridge. It helps people cross safely into the future. The process of financial modelling involves the following stages;
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Collect Data: Numbers are needed for the model. This includes past sales, costs, market size, or any other detail related to money.
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Make assumptions: Assumptions are guesses made based on facts. For example, we may assume sales will grow by 10% each year.
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Build the structure: The model is built step by step. It usually has income statements, balance sheets, and cash flow statements.
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Add formulas: Formulas are added to calculate totals, profits, or losses.
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Test the model: The model must be checked to ensure no mistakes have been made. Small errors can lead to wrong results.
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Use the model: Once the model is ready, it can be used to make choices. For example, it may suggest whether to invest in a project or not.
Types of Financial Modelling
There are many types of financial models. Each type has a different purpose. Each type of model acts like a tool. Just as different tools are used for cutting, building, or painting, different models are used for different business needs. Some of the common types of financial models are provided in the table below:
| Types of Financial Modelling | |
| Types | Details |
| Three-statement model | This model connects the income statement, balance sheet, and cash flow. It shows the complete picture of a company’s money. |
| Discounted Cash Flow (DCF) model | This model is used to find the value of a business. It looks at future cash and brings it to present value using discount rates. |
| Merger and Acquisition (M&A) model | This is used when one company wants to buy another. It shows if the deal will be profitable. |
| Initial Public Offering (IPO) model | When a company wants to sell its shares to the public, this model is used. It helps in setting the right share price. |
| Budget model | This is used for planning yearly spending. It helps a company control costs. |
| Forecasting model | This model guesses how the company will perform in the future. It is often used for long-term planning. |
| Leveraged Buyout (LBO) model | This model is used when a company is bought mostly with borrowed money. It checks if the deal can give good returns. |
Financial Modelling Techniques
Financial modelling techniques are the methods used to build and test models. They help make models reliable and useful. By using these techniques, financial models become strong and practical. They give better results and help in wise decision-making. Some of the primary financial modelling techniques are as follows:
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Historical Data Analysis: Past data is studied to understand patterns. For example, looking at sales for the last five years can help guess future sales.
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Scenario Analysis: This technique checks different situations. For example, analysing the scenario if sales rise, remain the same, or fall. It prepares the company for all possibilities.
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Sensitivity Analysis: This checks how small changes affect the model. For example, checking the sensitivity level if the interest rate increases by 1%.
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Comparative analysis: The company is compared with others in the same field. This shows strengths and weaknesses.
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Ratio Analysis: Ratios like profit margin or return on investment are used to measure performance.
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Visualisation: Charts and graphs are used to make results easy to understand. This makes the model clear even to those who are not experts in finance.
Financial modelling is used to understand money and plan for the future. From small shops to big companies, everyone can use financial models in making their choices. The Model is a mix of art and science. It uses numbers, data, and assumptions. Financial Models build a structured future analysis that helps people act smartly in the present. For students, learning financial modelling provides opportunities for several careers in banking, business, and investment. It also ensures better growth and stability for businesses
If you wish to excel in the job roles of FMVA, then enroll into PW's Finance Courses and learn a lot of concepts to boost your career in finance.
Financial Modelling FAQs
What is financial modelling?
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