Financial Model

A financial model links inputs, such as expected sales growth, prices, costs and interest rates, to outputs, such as profit, cash flow and value. When an assumption changes, the results update automatically.

Financial models are used for many purposes: budgeting and planning, valuing a company, deciding whether to invest in a project, evaluating an acquisition, planning how much to borrow or testing what happens under different scenarios.

For example, a model for a new restaurant might include assumptions about the number of customers per day, average spending per customer, food and staff costs, rent and opening costs. It would then show monthly profit and cash flow for the first few years and how long it might take to recover the initial investment.

A good financial model is clearly organised, separates assumptions from calculations and is easy for others to follow and check. Its results are only as reliable as its assumptions, so models are often tested with different scenarios to see how sensitive the results are to changes.