I build all kinds of financial models for customers and one thing I don't often get to be a part of is the actually use of these templates. Here we are going to take a look at the various groups of people that are actually plugging in real data and/or studying a template that is already made. There are a few different perspectives here.
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Note, all the below groups are my potential clients and I have to try and think of all the perspectives that may be using a model when I'm trying to build one.
Financial models are used by a variety of professionals and entities to facilitate decision-making, analyze investment opportunities, and forecast financial performance. Some of the typical users of financial models include:
- Investment Bankers: They use financial models to value companies, especially in mergers and acquisitions, initial public offerings, and other transactions. The Discounted Cash Flow (DCF) model is particularly popular in this sector. You will find a DCF analysis in all the bottom-up financial models here as well as the SaaS and real estate models.
- Equity Researchers: These professionals use models to forecast a company's future earnings and recommend buy/sell decisions on stocks.
- Asset Managers and Mutual Fund Managers: They use models to value investments and decide on asset allocation for portfolios.
- Corporate Finance Professionals: Inside companies, financial analysts use models to forecast the company's future earnings, decide on capital budgeting projects, and analyze various other corporate finance tasks.
- Private Equity Professionals: They use financial models to evaluate potential investment opportunities, typically focusing on leveraged buyouts and the returns they can expect on their investments. Every startup model I have will include inputs for debt funding / leverage and a capex schedule, which can be used to enter the cost to acquire the business being studies.
- Venture Capitalists: They use financial models to assess the potential returns from investing in startups or early-stage companies.
- Real Estate Professionals: Developers and investors in real estate often use financial models to determine the profitability of projects or investments.
- Management Consultants: They might develop financial models to support strategic decisions, operational improvements, or other consulting engagements.
- Credit Analysts and Lenders: They use financial models to evaluate the creditworthiness of borrowers.
- Project Finance Professionals: They use detailed financial models to assess the feasibility and returns of large projects, such as infrastructure projects.
- Treasurers and Risk Managers: They might use models to manage a company's liquidity, determine financing needs, or hedge financial risks.
- Startups and Entrepreneurs: They use financial models to forecast their businesses' growth, understand cash burn rates, and often to present to potential investors.
- Academics and Students: In finance and business courses, students and teachers use financial models to understand theories, concepts, and real-world applications.
- Individual Investors: Sophisticated individual investors may also build or use financial models to guide their personal investment decisions.
- Regulators and Policy Makers: They might use financial models to understand systemic risks, forecast economic growth, or craft policies.
While these are typical users, it's essential to note that the accuracy and utility of a financial model depend on the inputs, assumptions, and the structure of the model. Always vet and understand any model before relying on its outputs.
Article found in Accounting and Finance.
