Financial Modelling: Key Components
Financial modeling involves creating a detailed representation of a business or financial situation, typically using spreadsheets, to analyze its financial performance and make decisions. Here are the key components of a financial model: 1. Input Assumptions The foundation of a financial model, where key variables and assumptions are defined. Includes: Revenue drivers (e.g., price, volume, growth rates). Cost drivers (e.g., fixed and variable costs, inflation rates). Capital expenditure (CapEx) assumptions. Debt and equity structure (interest rates, repayment terms, equity injections). Macroeconomic factors (e.g., tax rates, currency rates, GDP growth). 2. Revenue Forecast Projects sales or income based on: Pricing models. Market demand or volume. Growth trends. Seasonal or cyclical factors. Divided into segments if multiple revenue streams exist. 3. Cost Projections Includes operating and non-operating expenses: Direct costs (COGS): Linked to revenue (e.g., materials, production cos...