Financial Models and the Investor's Dilemma
Types of financial models
A financial model has three main building blocks: inputs, calculations and outputs. There are several common types of financial models, all of which can be used for specific purposes:
A financial model has three main building blocks: inputs, calculations and outputs. There are several common types of financial models, all of which can be used for specific purposes:
- Business valuation/development/acquisition
- Raising capital
- Business and market expansion or consolidation
- Sale or divestment of assets and businesses
- Capital allocation
- Budgeting and forecasting
- Preparing for business transactions (mergers, share buybacks, acquisitions)
The three-statement model
One of the standard financial models for forecasting business performance for a given period is the three-statement model, which includes
One of the standard financial models for forecasting business performance for a given period is the three-statement model, which includes
- Income statement. It reflects the net profit of the company and records it during the financial year.
- Cash flow statement. It takes into account investing and financing activities. It uses non-cash expenses and changes in net working capital to adjust the company's net profit.
- Balance sheet: reflects the company's assets and sources of finance.
"It is shortsightedness to look too far into the future. Winston Churchill
Everything is getting more expensive, including money. Juggling financial ratios and deadlines has long been discredited. The ability to speak the same language as potential investors is valued. Developing a financial model is the most important stage of entering the investment market.
A financial model is not a set of figures and graphs for slides, but an effective management tool that helps to calculate different development scenarios and business prospects. In any case, without specifics and calculations, long-term investment forecasts seem unreliable and abstract. This is why the risk/return ratio is of particular interest. A well-prepared financial model solves the investor's dilemma and shows how he or she can save money and increase the investment by answering questions:
Everything is getting more expensive, including money. Juggling financial ratios and deadlines has long been discredited. The ability to speak the same language as potential investors is valued. Developing a financial model is the most important stage of entering the investment market.
A financial model is not a set of figures and graphs for slides, but an effective management tool that helps to calculate different development scenarios and business prospects. In any case, without specifics and calculations, long-term investment forecasts seem unreliable and abstract. This is why the risk/return ratio is of particular interest. A well-prepared financial model solves the investor's dilemma and shows how he or she can save money and increase the investment by answering questions:
- Who are the company's customers and what is the size of the market?
- What are the main drivers of income and expenditure?
- What is the value of the business?
- What is on offer to investors and how much can they earn?
Consolidation model
Combines data from different sources to provide a complete picture of the company's financial position and prospects. Unlike the sum-of-the-parts model, the consolidation model aggregates each business unit.
Budget model
The budget model is simple and essential for business planning. Depending on the financial calendar, you can include both monthly and quarterly figures. Like the three-report model, the budget model includes an income statement and allows financial analysts to plan for future years.
Combines data from different sources to provide a complete picture of the company's financial position and prospects. Unlike the sum-of-the-parts model, the consolidation model aggregates each business unit.
Budget model
The budget model is simple and essential for business planning. Depending on the financial calendar, you can include both monthly and quarterly figures. Like the three-report model, the budget model includes an income statement and allows financial analysts to plan for future years.
Discounted Cash Flow Model
The Discounted Cash Flow (DCF) model shows whether the current market value of a company is undervalued or overvalued. It takes into account the time value of a business by discounting projected free cash flows (debt or equity), which is a forecast of future income and expenses translated to the present.
Mergers and acquisitions model (M&A model)
This model estimates the financial impact of mergers and acquisitions. When presenting a project, you need to show investors how the business combination will affect the company's financial performance and present the likely benefits and risks.
Total value model
Combines several DCF models and various financial indicators to estimate the total value of a company. You need to show investors the key factors that affect value and how they are interrelated.
The Discounted Cash Flow (DCF) model shows whether the current market value of a company is undervalued or overvalued. It takes into account the time value of a business by discounting projected free cash flows (debt or equity), which is a forecast of future income and expenses translated to the present.
Mergers and acquisitions model (M&A model)
This model estimates the financial impact of mergers and acquisitions. When presenting a project, you need to show investors how the business combination will affect the company's financial performance and present the likely benefits and risks.
Total value model
Combines several DCF models and various financial indicators to estimate the total value of a company. You need to show investors the key factors that affect value and how they are interrelated.
Forecasting model
By comparing future forecasts with current budget estimates, the model helps to assess the potential growth of a business. Investors are provided with forecasts of the company's revenues, expenses and profits based on current data and trend analysis.
IPO model (option pricing model)
Another model useful to investors and corporate institutions is the Initial Public Offering (IPO) model. The IPO model requires analysts to estimate the potential value of their company relative to similar companies based on an underlying assumption of how much potential investors will pay for potential shares in the company.
By comparing future forecasts with current budget estimates, the model helps to assess the potential growth of a business. Investors are provided with forecasts of the company's revenues, expenses and profits based on current data and trend analysis.
IPO model (option pricing model)
Another model useful to investors and corporate institutions is the Initial Public Offering (IPO) model. The IPO model requires analysts to estimate the potential value of their company relative to similar companies based on an underlying assumption of how much potential investors will pay for potential shares in the company.
Euphos Hub recommends
Finding an investor is not an easy task, so don't be afraid of the word "no": 300 investors turned down Walt Disney when he was looking for money to build Disneyland! Rejection can provide valuable insight into what investors are looking for and how you can improve your offer.
Financial advisors at Euphos Hub help startups develop financial models for their projects, participate in investor searches, prepare presentations and represent funders in negotiations with customers and investors.
Finding an investor is not an easy task, so don't be afraid of the word "no": 300 investors turned down Walt Disney when he was looking for money to build Disneyland! Rejection can provide valuable insight into what investors are looking for and how you can improve your offer.
Financial advisors at Euphos Hub help startups develop financial models for their projects, participate in investor searches, prepare presentations and represent funders in negotiations with customers and investors.
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