Financial Planning, Modeling & Forecasting
Financial models and forecasts are common terms for financial professionals. They are the tools that facilitate analysis and decision-making for companies and businesses.
Financial Modeling
Financial modeling refers to the procedure of summarizing origination’s income and expenditures in a systematic way that can be used to determine future earnings and revenue and their impact on the company’s profitability for better decision making. It is the numerical representation of almost all characteristics of a corporate’s previous, existing, and future operations. Multiple models can conclude different results; however, the model’s efficiency depends on the validity and accuracy of assumptions and inputs.
Financial Modeling Significance and Implication
The financial model has multiple uses for senior management, BOD, and stakeholders of the company. Financial professionals and analysts use it to evaluate the impact of internal and external future events and forecasted economic changes on a company’s value and performance. It is also used to estimate a company’s valuation and compare its performance with its competitors in the sector. Executives can estimate the cost of investing in new projects and assess their profitability to make rational decisions considering calculated risks.
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Financial Forecasting
Financial Forecasting Significance and Implication
Forecasting is essential for accountants as:
- It provides a picture to plan cash flows to pay off liabilities
- It gives information to generate a reasonable budget and its allocation
- The decision about how much to invest in capital expenditure is made easier
- Entrepreneurs need to propose their start-up business plans to potential investors.
Financial Forecasting Limitations
Similar to financial modeling, financial forecasting also rely on historical data and assumptions. Forecasting also has a high reliance on forecasting techniques. One of the main limitations for financial planning and forecasting is uncertainty associated with factors and the future. Drastic amendments in the external environment, e.g., Legal and Economic changes, can adversely affect the financial forecast.