Financial Model

What Does Financial Model Mean?

A financial model is a tool used by an investment bank to build the forecasted financial statements for a company that is being positioned for sale. The financial model usually projects the balance sheet, income statement and cash flow statements monthly for a period of three to five years. A good financial model provides all the key assumptions and allows the user to run sensitivity analysis by changing one or several assumptions at one time and see the overall results on the projected numbers. The model is used by investors, corporate acquirers, and banks to assess a transaction's merits and ultimately determine if a deal is worth pursuing further.

Divestopedia Explains Financial Model

Financial models are primarily used as tools to assess the attractiveness of an investment. A good model provides all the key assumptions and allows the user to run sensitivity analysis by changing one or several assumptions at one time and see the overall results on the projected numbers.

In addition to the monthly projected financial statements, a financial model will include:

• An input schedule- summarizes all assumptions used including a build-up of revenue based on the key revenue drivers and a detailed cost analysis. This is the main page where all assumptions can be changed and the financial projections with automatically be updated;
• Sources and uses - summarizes the sources and uses of capital that will be used in the transaction;
• Continuity schedule - summarizes the repayment of debt and equity; and
• Investment analysis - summarizes the expected return on the investment.