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Financial Modeling Definition and Quiz
Which is more widely practiced? Granular company-specific financial modeling or more broad and risk-encompassing investment modeling? It's hard to say.
Define - Define financial modeling.
Context - Use financial modeling in a sentence.
Quiz - Test yourself.
Published: September 21, 2016
Updated: February 17, 2021
Every financial statement looks different and financial modeling is well-suited for customized analysis. See what's missing below.
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Understanding financial modeling
Financial modeling is the process of developing financial projections
for a company, typically in a spreadsheet. It can be performed for
both public and private companies, and is one component of
fundamental analysis. See also investment modeling.
Synonym: pro-forma model
For context, it's safe to say that nearly all financial analysts have a
comfort level with building financial models in Excel. The ability to
create reports quickly is one advantage over a programming language.
Common uses include developing financial projections, building pro-forma
financial models, and downloading and populating data from service
Spreadsheets for financial analysis offer the following advantages:
- Pervasive - cheap or free and knowledge is widespread.
- Easy to learn - grid format is easier to learn than
- Visualization - easy to construct charts and graphs.
- Functionality - intermediate financial and statistical
Commonly cited disadvantages of spreadsheets include:
- Error prone - as many as 80% of spreadsheets have errors.
- Rarely audited - reviewing all cells is uncommon.
- Data relationships - referential integrity tests are
less robust than in a database.
- Formatting is slow - inconsistencies across
spreadsheets take time to adjust.
In a Sentence
Pam: Did you hear that sell-side analyst
on the call grill the Ford CEO on SG&A guidance?
Eve: Yep, another example of the blame game.
His financial model of EPS missed by a penny.
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Which of the following is not typically analyzed when
financial modeling? |
Cash Flows or Capital Expenditures or Stock Correlations
Which is not a drawback associated with financial modeling in a
Ability to handle big data, cell formula errors, software
dependencies, or speed
Software dependencies. Unlike with programming, spreadsheets require
Questions or Comments?
Still unclear on Financial Modeling? Check out the deep-dive into Excel
where we build advanced financial models for evaluating stocks with a free
data set and 27 videos, in Quant 101.
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public company analysis
private company analysis
what is financial modeling
income statement analysis
balance sheet analysis
cash flow statement analysis
pro-forma financial model
stock valuation model
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