Financial Data Modeling: Examples & Tips

Business decisions take place on a daily basis, and more often than not, they depend on the company’s financial health. Financial data modeling provides a way to understand key metrics and represent them to have a clear view of the business’ financial status at any point in time. 

The importance of financial modeling cannot be understated. As such, we’re going to explore how to execute financial modeling, as well as how finance automation software can provide useful analytics for agile decision making. 

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What Is Financial Modeling?

Financial modeling brings together finance, business, and accounting metrics to represent a company’s financial status. Not only does financial data modeling provide a current visualization, but it can also be used to forecast future scenarios. 

A financial model can be created by using a financial model template and automation tools, or by way of a spreadsheet in which a company’s expenses and earnings are used to calculate the outcome of future decisions. Of course, it’s easier and less error-prone to make use of a financial modeling tool that accurately compiles data and creates visualizations. 

In most cases, financial modeling is used to inform operational business decisions and conduct financial analysis. 

What is an Example of Financial Modeling?

Financial modeling comes in all shapes and sizes, depending what you are busy analyzing. A common example of financial modeling that’s often forecasted is sales growth. 

In order to calculate future sales growth, a financial model leverages sales in the current time period versus the previous time period that you are analyzing (i.e. year or quarter). Only the inputs can be changed, while the output (or future sales growth) is the output based on the two inputs. 

What is Financial Modeling Used For?

Business owners, executives, and stakeholders leverage financial modeling to assist with making decision regarding:

• Project prioritization 
• Risk management
• Budgeting
• Business growth 
• Company valuations 
• Acquisitions 
• Capital funding 
• Divesting 
• Asset allocation and distribution 

Since companies possess a ton of financial data, it might as well be used for informative insights. Finance automation tools like SolveXia can connect your existing systems, compile relevant data, and help to streamline critical finance functions, including financial analysis, reconciliation, expense management, regulatory reporting, and more. 

By doing so, businesses can answer big questions and have a better understanding of how the business is faring. With deep insights and customizable dashboards, it’s possible to make strategic and operational decisions without doubts. 

What to Include in a Financial Model?

A financial model’s outputs are only as good as its inputs. That’s why clean, consistent, and up-to-date data is necessary. 

If you’re creating your own financial model, it’s recommended to include:

• Income statement
• Balance sheet
• Supporting schedules
• Cash flow statement 
• Assumptions and drivers 
• Charts 
• Graphs

As you can see, your financial statements play a clear role in financial data modeling. By using a finance automation platform like SolveXia, you can rest assured that your financial data is in good standing. SolveXia is capable of manipulating data, performing calculations, and creating easy-to-understand reports. 

What Software is Best for Financial Models?

There are different types of tools you can use to create financial models. Some companies choose to turn to financial modeling software that offers user-friendly interfaces, integration with existing systems, data visualization, security, and the like. Others will continue to work in Microsoft Excel with spreadsheets and formulas. 

However, spreadsheet-driven data is often siloed and error-prone due to the manual effort involved. When building financial models, it’s necessary to have a clear format, follow a logical flow with the design structure, and keep formulas as simple as possible. 

However you choose to conduct financial modeling, automation software can ease the load. Since financial models are based on historical data and financial statements, it pays to have these statements ready to go and easily accessible. 

With software like SolveXia, you never have to spend time digging for financial data and information, it remains centralized, secure, and ready to use. 

What are the Types of Financial Modeling?

Since financial models are used to answer important questions about how to proceed in business, the type of financial model you choose to use will depend on what you’re looking to learn. 

Here are some of the most common types of financial data modeling that you’ll want to know:

1. Three-Statement Financial Model

Want an eye into the future? The three-statement financial model calls upon the income statement, cash flow statement, and balance sheet to forecast what is yet to come in terms of your company’s financial status. 

It provides a comprehensive outlook on the business’ previous history, present standing, and future expectations. If you’re deducing what the best next action to take is for your business, you can use the three-statement financial model to predict outcomes based on each decision. 

This way, you can move forward with insights and confidence rather than having to guess the impact of today’s choices on tomorrow’s reality. 

2. DCF Model

The discounted cash flow, or DCF, model is used to evaluate a company’s valuation. To do this, it accounts for the company’s current value, as well as by predicting how much money will be made in the future. 

This model can be used to put a value on the company as a whole, or to value company shares, a specific project, an initiative, or anything else that impacts cash flow. 

3. M&A Model

The merger and acquisition (M&A) model is applied to understand how a merger or acquisition will impact the newly formed company’s earnings per share (EPS). 

When a company wants to know if a merger or acquisition will help or hurt its bottom line, it can use this model to compare the future EPS to its current-day EPS. If the resulting EPS is higher than the current EPS, then the merger or acquisition will prove to be beneficial. 

The opposite can be said if the earnings per share are expected to decrease. 

4. Forecasting Models

There are a few different types of forecasting models that can be useful when predicting future expenses, revenues, and capital costs. These include (in order of complexity):

5. Straight-Line Model

Considered to be the most simple forecasting model, the straight-line model leverages historical data to predict the future. 

6. Moving Average Model

The moving average model may be used to better understand a company’s performance on a monthly basis by taking the averages of the months, be it a three-month or five-month moving average, for example. 

7. Linear Regression Model

A linear regression model compares how two variables are related to one another. For example, how much would you need to increase your advertising budget to increase your revenue by 5%? This kind of model can provide correlations to know how to move forward. 

8. Time Series Model

Considered to be the most complicated forecasting model, the time series model aims to highlight patterns in historical data. Then, it uses the patterns to predict the future. 

9. Sum-of-the-Parts Model

For organizations that have many divisions, the sum-of-the-parts model can be used to separately value each business division or unit. Then, by adding them all together, you can get the overall value of the organization. 

Since there is a lot of data involved, teams may have a hard time conducting this model because it’s often hard to locate the right data. 

Reporting software and tools like SolveXia can come in handy because no one has to go digging across disparate locations to find the information they need to perform this model. 

10. Option Pricing Model

If you’re a company that holds or trades derivatives, the option pricing model may be needed. This model is used by securities traders who wish to make a profit or hedge risk. 

Those interested can choose between different options pricing models, including: Monte-Carlo simulations, binomial tree, or Black-Scholes, for example. 

Who Builds Financial Models?

Financial models are a must-have tool for financial professionals. They can be created and used by various people in the business, including: accountants, investment bankers, corporate development analysts, and equity research analysts. 

Financial and accounting teams naturally involve CFOs, as do these models. CFOs and management teams make use of the information from financial models to make key decisions regarding the company. 

Rather than your accounting team having to be bogged down creating models and calculating them by hand, they can make use of finance automation software and financial modeling tools so that they can instead focus their time and energy on the insights derived. 

In effect, accounting professionals can add greater value to the business as a whole by being able to advise on strategy and operational decisions, thereby further supporting the CFOs imperative role. 

Wrap Up

Financial data modeling is integral to making informed business decisions in regard to the present financial health of a company, as well as what it can expect in the future. 

With the use of financial automation software like SolveXia can add confidence by reducing manual errors, reduce bottlenecks, provide greater insights and analytics, plus save time and resources across your business. 

A financial tool like SolveXia connects all your data across systems, ensures accuracy, and can also be used to automate finance processes. Ready to learn more? We invite you to request a demo today!