Introduction to Financial Modelling
Principles of Excel as a Modelling Tool
Common Modeling Structures (I)
Further Operations and Shortcuts
Excel Functions (I): Information and Numerical Aggregation
Excel Functions (II): Conditionality, Aggregations and Arrays
Common Modelling Structures (II)
Excel Functions (II): Lookups and Referencing
Model Planning and Best Practices
CUTZ or ... intrducton to rest of program....and clisoing remarks
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1.3 Financial Modelling: Objectives and Applications

A “financial model” is simply one for which the real-life situation is in economics, business or finance. Financial models may also use large data sets or databases as part of their inputs, and so there is a close link with general data analysis (a link which is discussed in detail in later materials).

General Purpose of Financial Models

In general, the purpose of financial modelling is to assist in the identification, design and selection of the best course of action to achieve some objective. More specifically, modelling can be used to:

  • Assess the feasibility of a particular course of action, business or project.
  • Ensure that the decision processes are as robust and transparent as possible.
  • Make explicit the decision criteria that will be used (and calculate or forecast these).
  • Focus the decision process on the key factors and relevant items that affect a situation.
  • Improve one’s understanding (or beliefs or hypothesis) of the situation, including the degree of control or influence that one has over which items, and the residual areas of risk and uncertainty.
  • Determine the ideal data requirements (and compare this with available data).
  • Establish the impact of particular scenarios or uncertainties and risks to a forecasted value.
  • Highlight the need for additional actions or changes to original plans, targets or beliefs.
  • Set targets knowing the requirements and likelihood of reaching them.
In summary, by assessing the effect of actions that are under one’s control, one can create and test alternatives, choose the best, and appropriately manage the risks and uncertainties.

Typical Areas of Application

Financial models are used in many areas:

  • For general forecasting, planning, budgeting, and resource planning.
  • To assess performance and set targets.
  • To evaluate investment projects and of portfolios of projects.
  • To analyse data sets and statistics not only to populate inputs of the model, but also to implement data-driven predictive calculations.
  • To understand risks and uncertainties and optimise decisions and exposures.
  • To value enterprises, corporations, debt and equity, of bespoke financial instruments and derivatives, of legal contract clauses and real options.
  • To forecast aggregate business performance and corporate planning. One may wish to determine finance needs,  establish the debt capacity of projects or corporations, understand credit risk, or assess merger synergies, and so on.
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