Financial Modeling
The process of building a mathematical representation of a company's financial performance to support analysis and decision-making.
What is Financial Modeling?
Financial modeling is the process of constructing a spreadsheet-based representation of a company's financial performance — typically in Microsoft Excel — that links historical data, assumptions, and projections into an integrated three-statement model (income statement, balance sheet, and cash flow statement). Models are built for purposes including company valuation (DCF analysis), merger and acquisition analysis, leveraged buyout (LBO) analysis, capital budgeting, and scenario planning. The output of a financial model is only as reliable as its inputs and assumptions; sensitivity analysis and scenario analysis are used to understand how outcomes change as key assumptions vary. Financial modeling is a core skill in investment banking, private equity, corporate finance, and equity research.
Example
An investment bank building a DCF model for a technology company projects revenue growing 18% annually for 5 years (based on management guidance and industry benchmarks), operating margins expanding from 12% to 20% (based on comparable mature-stage peers), then applies a WACC of 9% and terminal growth rate of 3% to derive enterprise value. The model outputs an implied share price of $72–88 per share — the analyst's 12-month price target — with the range driven by WACC and terminal growth rate assumptions tested in a sensitivity table.