A financial model can be used for a variety of professional purposes. Here just to name a few:
- Business Plan: A financial model is needed to prepare a business plan and obtain clarity of the expected financial situation of a company. The more solid and well substantiated the modeling logic is, the easier the business plan and its implications are understood.
- Scenario Analysis: Having a financial model ready for a business allows to run simulations how the financial outcome would look like when changing some of the scenario assumptions. This serves as a basis for strategy discussions and allows the management to prepare for such eventuality in time.
- Company Valuation: Also business plan can be used for doing a company valuation by applying the Discounted Cash Flow (DCF) method.
- Investment and capital allocation decisions: Within the company, capital is a scarce resource. Therefore one needs to figure out which projects are the most beneficial from a financial point of view, thus requiring financial models.
- Mergers & Acquisitions (M&A): A financial model forms the basis for negotiations in M&A transactions and capital increases and simulates how the company would look like when combining it with another company.