what is financial modeling 
financial modeling is the process of creating a summary of a company s expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision a financial model has many uses for company executives financial analysts most often use it to analyze and anticipate how a company s stock performance might be affected by future events or executive decisions investopedia michela buttignolunderstanding financial modelingfinancial modeling is a representation in numbers of a company s operations in the past present and forecasted future such models are intended to be used as decision making tools company executives might use them to estimate the costs and project the profits of a proposed new project financial analysts use them to explain or anticipate the impact of events on a company s stock from internal factors such as a change of strategy or business model to external factors such as a change in economic policy or regulation financial models are used to estimate the valuation of a business or to compare businesses to their peers in the industry they are also used in strategic planning to test various scenarios calculate the cost of new projects decide on budgets and allocate corporate resources 1examples of financial models may include discounted cash flow analysis sensitivity analysis or in depth appraisal one of the most frequently used models is the discount cash flow model which uses estimates of future cash flows to project the future value of an investment example of financial modelingthe best financial models provide users with a set of basic assumptions for example one commonly forecasted line item is sales growth sales growth is recorded as the increase or decrease in gross sales in the most recent quarter compared to the previous quarter these are the only two inputs a financial model needs to calculate sales growth the financial modeler creates one cell for the prior year s sales cell a and one cell for the current year s sales cell b the third cell cell c is used for a formula that divides the difference between cells a and b by cell a this is the growth formula cell c the formula is hard coded into the model cells a and b are input cells that can be changed by the user in this case the purpose of the model is to estimate sales growth if a certain action is taken or a possible event occurs of course this is just one real world example of financial modeling ultimately a stock analyst is interested in potential growth any factor that affects or might affect that growth can be modeled also comparisons among companies are important in concluding a stock purchase multiple models help an investor decide among various competitors in an industry 