A financial model is a special document that contains the calculation of certain financial indicators of a company based on information about the projected sales volume and planned costs. The main task of this model is to evaluate the effectiveness of the use of available resources.
Based on practice, the financial model includes the calculation of the organization's revenue, taking into account the cost and physical parameters of sales, as well as purchases, product costs, production volumes, other income and expenses, investments, company obligations and cash flows. The final stage of building this model is the formation of the forecast balance, as well as budget revenues and expenditures. The purpose of the work carried out is considered to be the determination of the values of changes in the financial result of the enterprise with any dynamics of the parameters involved in these calculations.
The financial model is based on such a key principle as the determination of the barrier rate of return on capital. In other words, identifying the minimum level of profitability frominvestments should be provided by a group of managers in the enterprise. It is its identification that will help to clearly formulate the requirements for the result.
The financial model is based on another principle - focusing the analysis on the level of liquidity of the company's economic activity. This concept is directly related to focusing on the value of the business for the founders.
The financial model of an enterprise can be defined as a simplified mathematical representation of the real financial side of the company's economic activity.
This definition of a model means that it is used by management to attempt to represent the complex nature of a certain financial situation or a set of certain relationships in the form of simplified mathematical equations.
The financial model, like any economic category, has its own purpose, which is to assist the head of the company in making a decision. The purpose of such modeling can be considered in more detail when examining some of such simple samples as estimates, linear programming and analysis of the value of production volume and profit.
As mentioned above, the financial model provides guidance on the necessary analytical information used as the basis for making more informed decisions. Said information can be analyzed under two headings:
1. Achievement of the goal. Using the financial model, the manager includes some datainto an analytical image and, thus, receives an answer whether the results will contribute to the achievement of the company's goal. For example, for a manufacturing enterprise - profit maximization.
2. Risk analysis. This is an important enough element of the decision-making process to facilitate instant sensitivity analysis of any decision.
It should be noted that the financial model is closely related only to the quantitative side of decisions. When making the right decision, qualitative aspects should also be taken into account, which are no less important than quantitative ones.