Types of Financial Models: What You Need to Know

Did you know that 82% of businesses fail because of cash flow problems? As a business owner, it’s crucial to have a good idea of where your business stands financially.

You might be wondering, what are financial models? Considering there are various types of financial models, it can seem daunting to learn.

While it can seem overwhelming, it doesn’t have to be. Read this guide on the different types of financial models today.

3-Statement Financial Model

The 3-Statement Financial Model includes a balance sheet, cash flow statement, and income statement. Cash flow looks at changes in net working capital, non-cash charges, etc. It can also include activities for financing and investing.

Balance sheets look at the maintenance of assets. It also defines where funding comes from. Income statements will define a company’s profit, including net income.

Through financial models, you’ll want to use design thinking to help you determine future expected performance. Future performance will be based on the net profit, gross, EBITDA (earnings before interest, taxes, depreciation, and amortization), and operating margin.

The revenue growth rate will also be factored in. Many consider this one of the best financial models.

Consolidation Models

The Consolidation Model has multiple business units. Each unit will have its own financial data consolidated against other business units. It provides you with a worksheet.

A popular financial plan by investment developers and bankers is the Initial Public Offering Model. They want to understand values before going public. It defines how much investors are willing to pay for shares before selling them.

Leveraged Buyout Model

Calculate the annualized or multiple rates of return you could have when you invest in a company and then sell. You don’t need full financial statements for these models.

You’ll approximate the company’s cash flow, expenses, and revenue. This will tell you the cash it generates from its business operations. You can also determine the holding period, internal rate of return, and invested capital.

Private equity firms use this model to include equity and debt. The cash flow will pay off debt and sell the company years down the line.

It tends to be more difficult to use than a 3-Statement Model. If you don’t use debt, it’s easier to calculate.

Then you only factor in the exit value, purchase price, and cash flow projections. You’re still determining multiple annualized returns and invested capital.

Accretion/Dilution M&A Model

This is a more complicated financial plan than the others since you’re analyzing a potential transaction. You’ll look at the potential impact and the future earnings per share.

It can include:

  • Deferred taxes
  • Advanced Purchase Price Allocation
  • Calendarization
  • Debt financing

Understanding the Various Types of Financial Models

After exploring this guide, you should have a better idea of the various types of financial models. Take your time deciding which is best for you and your business.

Would you like to read more educational content for businesses? Then, be sure to check out our other articles today! Would you like to read more educational content for businesses? Then, be sure to check out our other articles today!


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