7 types of financial models

7 types of financial models you should know about to make more informed business and financial decisions.

These models represent the financial performance of a business, project, or any other investment.

1. 𝐓𝐡𝐫𝐞𝐞 𝐒𝐭𝐚𝐭𝐞𝐦𝐞𝐧𝐭 𝐌𝐨𝐝𝐞𝐥

Integrate the income statement, balance sheet, and cash flow statement into one financial model.

2. 𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 (𝐃𝐂𝐅) 𝐌𝐨𝐝𝐞𝐥

Estimates the value of an investment based on its expected future cash flows, which are then discounted to their present value.

3. 𝐋𝐞𝐯𝐞𝐫𝐚𝐠𝐞𝐝 𝐁𝐮𝐲𝐨𝐮𝐭 (𝐋𝐁𝐎) 𝐌𝐨𝐝𝐞𝐥

Use in private equity and investment banking to evaluate the financial viability of acquiring a company using a significant amount of borrowed money (leverage) to meet the cost of acquisition.

4. 𝐌𝐞𝐫𝐠𝐞𝐫𝐬 𝐚𝐧𝐝 𝐀𝐜𝐪𝐮𝐢𝐬𝐢𝐭𝐢𝐨𝐧𝐬 (𝐌&𝐀) 𝐌𝐨𝐝𝐞𝐥

Combine the financial statements of the two companies, adjust for synergies, and evaluate the impact on earnings, the balance sheet, and the valuation of the combined entity.

5. 𝐂𝐨𝐦𝐩𝐚𝐫𝐚𝐭𝐢𝐯𝐞 𝐂𝐨𝐦𝐩𝐚𝐧𝐲 𝐀𝐧𝐚𝐥𝐲𝐬𝐢𝐬 (𝐂𝐂𝐀) 𝐌𝐨𝐝𝐞𝐥

Value a company based on the valuation metrics of similar companies in the industry. Metrics such as P/E ratio, EV/EBITDA, and others are used to compare and value the business.

6. 𝐒𝐮𝐦-𝐨𝐟-𝐭𝐡𝐞-𝐏𝐚𝐫𝐭𝐬 𝐌𝐨𝐝𝐞𝐥

Value a company with several business units or investments by valuing each individually and then adding them together to get the total enterprise value.

7. 𝐌𝐨𝐧𝐭𝐞 𝐂𝐚𝐫𝐥𝐨 𝐒𝐢𝐦𝐮𝐥𝐚𝐭𝐢𝐨𝐧 𝐌𝐨𝐝𝐞𝐥

Run simulations multiple times with different variables to predict the likelihood of different outcomes for investments or projects.

They help predict future outcomes, assess investments, and plan for success.