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Financial Modeling
Financial modeling helps identify a company’s or individual current financial status and forecast its future financial position. Proper financial modeling helps guide decision making in matters of investments, savings, expenditure, and future expansion plans in a company or business. Financial modeling entails accounting, business, and financial metrics to capture and represent the financial position under assessment. Companies use different financial models, depending on the company’s financial goals and operations. Some of these models include the Three Statement Model, the Discounted Cash Flow (DCF) Model, the Merger (M &A) Model, and the Initial Public Offering (IPO) Model, among several others. Of these models, I resonate more with the Three Statement Model.
The Three Statement Model focuses on the income statement, the balance sheet, and the cash flow statement. I resonate more with the Three Statement Model because it represents a person’s or a company’s actual financial status. The income statement gives the actual figures for the income generated from income-generating activities. In contrast, a cash flow statement gives the value of all cash and cash equivalents coming into or leaving a company. The balance sheet gives a clear overview of all the income, expenses, assets, and liabilities. The information entered into and received from the three statements provides an all-inclusive view of a company’s financial history, current financial position, and future financial standing.
Further, the Three Statement Model allows for a more comprehensive prediction of a company’s financial status, hence my preference. This model enables a company to explore its future performance and establish how best to achieve the predicted financial position. Also, it allows for easier decision making on issues such as future mergers, acquisitions, partnerships, investments, and business expansion. Knowing how business is expected to perform in the future makes it easy to plan how to get there.