An independent investment and business consultant in the Chicagoland city of Portage, Indiana, Erich Squire formerly served tenures as Senior Vice President of Finance and Vice President of Corporate Development, Financial Planning, and Analysis with Chicago’s Century Aluminum. One of Erich Squire’s areas of professional expertise is financial modeling.
The Financial Model Defined and Explained
The financial model has become an essential tool of informed decision-making in the world of finance. These tools employ complex digital algorithms to produce detailed forecasts of future financial progress and events.
To develop a financial model, programmers input a broad array of company and market data into a digital platform that employs various forms of artificial intelligence and/or machine learning to make sophisticated predictions about future economic health. The platform then uses this data to analyze ongoing and future trends within a pointed virtual reality with a singular focus that attempts to replicate real world financial and business conditions as closely and dynamically as possible. Although financial models can cover virtually any specific period of time, most tend to look into the future for a timeframe that spans five to ten years.
It is important to remember that financial models, like any form of forecasting and prediction, can be flawed and produce inaccurate results. However, financial models have become incredibly refined and precise in recent decades. Furthermore, finance and technology leaders continue to work together to produce financial models that are more and more accurate and easy to use.
Decisions That Are Commonly Based on Financial Modeling
In fact, the average financial model has become so accurate and easy to use that the tool is now a standard component of strategic and operational processes for company owners, senior business executives, and asset managers of all types. Although financial modeling has proven useful in a variety of contexts, it is most commonly applied when making important decisions regarding…
- Valuations and investments – Before devoting significant assets to a particular venture, it is important to gain as much insight as possible into the future performance capabilities of that venture. In the words of Forbes Councils Member Ian Schoor, “companies use models to answer questions such as ‘Should we buy another company? If so, how much should we pay?’.”
- Planning and budgeting – Outside the worlds of strategic development and growth through investment, financial modeling is key when making important general administrative decisions that range from operational resource allocation to hiring/downsizing staff.
- Credit and leverage buyouts – Financial models have helped countless companies and investment firms make informed and financing decisions. These models provide detailed insights into credit and debt management.
- Mergers and acquisitions – Similar to general buyout and investment decisions, decisions involving mergers and acquisitions (M&A) can be complicated to say the least. Therefore, financial modeling can offer exceptional guidance in the M&A sphere.
To Learn More
If you want more information about financial modeling and its place in the modern worlds of business and investment, get in touch with leading Chicago analyst and consultant Erich Squire. As an expert in this rapidly evolving modality, he can discuss exactly what financial modeling can do for you.