What is a financial model used for?

A financial model serves as a critical tool within financial management, primarily used for decision-making and forecasting. It typically involves a structured framework that connects various financial data inputs, allowing organizations to analyze and predict the financial outcomes of different scenarios. This can include assessing the impact of various influences such as market changes, operational shifts, or financial strategies on an organization’s profitability and cash flow.

The robust nature of financial models enables decision-makers to evaluate investment opportunities, determine pricing strategies, assess risk, conduct valuations, and facilitate strategic planning. The predictive capabilities of these models are invaluable, as they help businesses understand possible future trends based on historical data and currently available information, thus allowing for more informed and strategic decision-making processes.

While budget planning is one aspect of financial modeling, defining the model's purpose solely for that activity limits its overarching utility. It extends far beyond just forming budgets, playing a vital role in comprehensive financial planning and analysis across an organization.