Every business, investment, or financial project in Nigeria requires financial modeling to provide core insights into the future performance and viability of such business or investment. From predicting cash flows to identifying investment opportunities, financial modeling arms decision-takers with data-backed-up analysis.
In this article, we will get into financial modeling, the importance of financial modeling, and financial modeling templates.
Table of Contents
What is Financial Modeling?
Financial modeling is a phenomenon that involves the process of creating a mathematical representation or simulation of an economic structure or a financial asset.
It involves the process of modeling in software like Google or Excel spreadsheet to analyze and predict the performance of an enterprise or business based on past data and gut feeling.
The main aim of financial modeling is to make data-driven decisions by assessing various financial situations or scenarios. It enables stakeholders to evaluate the economic viability of projects, assess risks, apportion resources, and optimize the overall financial performance of the business or investment.
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Financial Model Templates for Business Owners
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Capital budgeting
This is the type of financial modeling template employed by businesses or companies that are unsure of how to allocate their resources (money).
Let’s take Sundry Foods as an example. Sundry Foods has some money to open a Kilimanjaro branch either in Niger state or in Nasarawa state. The finance team would have to use the Capital budgeting models to determine which state it would be. The financial team will consider variables like capital, cash inflow, cash outflow, net cash flows, etc, for both states before any decision is taken.
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Variance financial model
This type of financial modeling template involves a detailed analysis of a business’s income and expenses. Simply put, it tracks how a company is doing regarding budget. This type of financial model shows the difference between the planned and actual budgets. And guess what? You can also use this model in personal finances.
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Comps valuation model
This is a model used by companies who get financials from similar companies, then use it to evaluate their finances. For instance, Crunchies can look at Tastia’s financials and use them as a basis for the Company’s financial performance or evaluation.
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Three statement model
This type of financial model template links a business’s income statement, balance sheets, and cash flow statement to make data-driven assumptions.
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Discounting cash flow model
This is the opposite of the comps valuation model. This model uses the Company’s internal cash flow to derive valuation unlike the comps valuation model, where a similar company’s internal cash flows are used as the foundation for valuation.
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Financial ratio analysis
This template calculates and analyzes key financial ratios such as profitability, liquidity, leverage, and efficiency ratios. They provide insights into a company’s financial health and performance relative to industry benchmarks.
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Sensitivity analysis
This template assesses the impact of key variables or assumptions changes on financial outcomes. It helps identify risks and uncertainties and their potential effects on the economic viability of a project or investment.
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Dashboard and scorecards
These templates present summarized financial data and key performance indicators (KPIs) in a visually appealing format. They provide a quick overview of a company’s financial status and performance trends.
These financial model templates are valuable tools for businesses, investors, and financial professionals in analyzing, planning, and managing financial resources effectively. They can be customized and tailored to specific industries, companies, or investment scenarios to meet particular needs and objectives.
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Significance of Financial Modeling Templates
Building a financial model from the ground up can be time-consuming, especially for complex analysis. Templates provide a starting point with pre-defined structures and formulas that can save you time and energy.
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Standardization
Financial modeling templates follow best practices and industry standards to ensure consistency across different models, which is essential for comparing, auditing, and collaborating among stakeholders.
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Error reduction
Templates are tested and validated to reduce the risk of errors or formula inconsistencies. By using established templates, you can minimize the chance of inaccuracies in your financial models.
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Customization
Templates provide a structured framework but allow you to customize the model to suit your business or analytical needs.
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Learning tool
Financial modeling templates can be a great learning tool for individuals looking to improve their modeling skills by analyzing existing templates. You can gain insight into modeling techniques, how to construct formulas, and best practices by analyzing existing templates.
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Benefits of Undertaking a Financial Modeling Course
Every business or enterprise needs to understand how financial modeling works. Given its essential role in a business’s decision-making process, every business needs the core knowledge of financial modeling. The following are the benefits of taking a financial modeling course:
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Improved decision making
The creation of several scenarios and projections, which can help assess the potential outcomes of individual strategies and inform decisions, shall be possible through financing models.
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Better planning and forecasting
Individuals and organisations can accurately predict future financial performance by developing financial models, helping to identify potential problems and opportunities in advance.
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Expanded effectiveness
Finany modeling can offer assistance in streamlining budgetary forms and make them more proficient, diminishing the time and effort required to analyze financial information.
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Upgraded communication
Financial modeling can give a lucid and straightforward way to communicate financial data and results to partners, counting financial specialists, moneylenders, and administration.
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High risk management
Monetary modeling can assist in recognizing potential risks and their potential effect on monetary execution, empowering businesses and organizations to create procedures to relieve those risks.
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Better understanding of business finances
Financial modeling offers excellent insight into the overall finances of your business. You get to know how much is going out and how much is going in. You also get to make informed predictions on the state of your business in the near future.
Conclusion
Financial modeling could be a cornerstone of budgetary investigation, empowering businesses to create educated choices based on quantitative data and investigation.
Undertaking a financial modeling course allows experts to upgrade their aptitudes, progress their careers, and remain competitive within the Nigerian financial industry.
Also, leveraging financial modeling templates streamlines the model-building handle, increases consistency and precision, and encourages productive decision-making. By understanding the quintessence of financial modeling and putting it to use, businesses can create room for more success.
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Edited by Oluwanifemi Akintomide.
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