Financial models are powerful tools used for a variety of purposes to assess forward looking financial information to overcome limitations of relying only historic information Some of the best uses for financial models are:
- Budgeting and Forecasting: Companies use financial models to project future revenues, expenses, and cash flows. This helps in creating budgets, financial plans, and long-term forecasts, enabling better financial planning and resource allocation.
- Performance Analysis: Models help in analysing a company’s past performance to identify trends, strengths, and weaknesses. This can inform strategic decisions and operational improvements.
- Risk Management: Financial models are used to assess and manage financial risks. This includes stress testing, scenario analysis, and sensitivity analysis to understand the impact of various risk factors on financial outcomes.
- Capital Structure Decisions: Businesses use financial models to evaluate different financing options, such as debt vs. equity, and to determine the optimal capital structure that minimises the cost of capital while maximising shareholder value.
- Strategic Planning: Models assist in strategic decision-making, such as entering new markets, launching new products, or restructuring operations. They provide a basis for evaluating different strategic options and their potential financial impact.
- Business Valuation and Investments: Models are used to determine the value of a business for mergers and acquisitions, fundraising, or initial public offerings (IPOs).
- Audit compliance: Financial models can be used to demonstrate an entity is a going concern. Auditors will assess forecasted cash flows and balance sheets when preparing an audit opinion and a well built financial model will increase confidence in the business capability.
We support clients build financial models for a range of business requirements, from simple forecasts to developed models to support decision-making. If you want to know more, contact solutions@linkstoneadvisory.com.
