Short definition: Financial modeling is the process of creating a mathematical representation of a real-world financial situation or system.
Explanation: Financial models are used to analyze, forecast, and evaluate the financial performance of a company, project, or investment. They can be built using spreadsheets, specialized software, or programming languages. Financial models typically include inputs such as historical financial data, assumptions about future performance, and various financial calculations.
Example: A financial model for a startup company might include projections of revenue, expenses, and cash flow over the next several years. The model could be used to assess the company’s financial viability, determine its funding needs, and evaluate potential exit strategies.
Additional information (optional): Financial models can be simple or complex, depending on their purpose and the level of detail required. They are used by a wide range of professionals, including financial analysts, investment bankers, portfolio managers, and corporate executives.