What is Financial Modelling and Why Is It Important for Businesses?

 Facebook recently decided to invest around $5.7 billion in Reliance Jio in exchange for a 9.99% stake in the latter company. Google soon followed suit and revealed that it will invest $4.5 billion in India’s telecom giant. How did these companies know that Reliance Jio is a worthy investment? Or, how did they know exactly how much to invest? Among all the complicated parameters that the financial and investment analysts of Facebook and Google must have considered, one important tool they used is financial modelling. By placing Jio’s financial statements into equations and formulas, Facebook and Google know the expected capital return of their investment. So, what is financial modelling all about? And why is it important? Let’s find out.

What is financial modelling?

Financial models are instruments used by analysts to predict a business’s future performance depending on some data that is already available from the company’s history. For instance, to predict the capital that is sensible to invest now, a financial analyst may create the discounted cash flow model from the company’s historical cash flow statement and forecast the cash flows for 5 years into the future to come to the present value. Financial models are typically built on MS Excel, although dedicated software applications are available. And the skill is vital for all professionals who aspire to become financial or business analysts. One can acquire this skill by taking up a financial analysis course.

Why is financial modelling important?

The aforementioned Facebook and Google example shows the importance of financial modelling in making investment decisions. Similarly, financial institutions like investment banks and insurance firms depend on the various known models for equity valuation and accounting. Corporations also depend on financial models to make internal capital and labour investment decisions based on performance predictions returned by the analysis.

Another crucial area where financial models play a vital role in businesses is in making decisions involving mergers and acquisitions. Businesses merge to benefit both entities and companies look for complementary enterprises that have the potential of inflating the formers’ revenues. Among the available options, it is the financial models that help the analysts receive an insight into the future of the merged companies and decide now whether the fusion is viable. Financial models come in handy during raising capital from investors. And they help investment portfolio managers to make sound investments. Without financial models, almost all companies in all industries will struggle to exist.

How do financial models concern you?

Despite the available software and known equations, financial models involve a fair bit of assumptions. And the accuracy of the predictions depends heavily on the precision of the assumptions made by analysts. Hence, the task of creating a financial model is not handed over to some random employee. Companies hire trained professionals and pay them hefty sums to craft accurate financial models.

The best financial analysis course can prepare you to create financial models efficiently. You will need the training to understand the involved nuances and grasp the underlying complexities. No one can start building models with just the understandings of financial accounting or MS Excel. To help businesses make decisions, professional certified coaching is important to become the sought-after analyst. To understand what is financial modelling - join a business-oriented course and acquire the required skills.