Strategic Financial Modeling

The word modeling refers to complex mathematical calculations. Financial models, therefore, refers to the creation of abstract representation of a company's financial statements. The idea behind the creation of these models is that decision-makers can simulate their decisions and finally see the impact on the company's finances. A financial model allows a company to simulate their revenue and expenses under various situations. This is the reason why financial models are extensively used when companies are about to make big decisions like launching a new product line, entering a new market, or acquiring a competitor.

There are several objectives of financial modeling such as profitability planning: the most obvious use of financial modeling is to optimize the day to day operations of a firm. This types of models is used by companies to ascertain how they can deploy their resources in the most profitable manner. Profitability analysis is different from capacity planning. Capacity planning is done keeping only operational considerations in mind. However, profitability analysis and planning takes a holistic view. Usually such models enable companies to decide on an optimal product mix which would enable maximum profitability.

In creating a revenue model financial mode is often called " model of models" this is because there are several parameters which go through a series of complex calculations themselves. Revenue is a perfect example of such parameters. For the financial model as a whole, the revenue number is just one of the many inputs required for the calculations to be run.