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Financial modeling

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Financial modeling is the job of building a financial model, a tool designed to forecast the performance of a business, project, or any other form of financial investment. A financial model uses relationships among macro-economic, operating, investing, tax, accounting, and financing variables to predict performance. The central aim of financial modeling is to forecast under uncertainty. A financial model must allow multiple scenarios to be run efficiently (deterministic modeling), and ideally also support probabilistic (or stochastic) Risk modeling.

There is considerable debate amongst experts in the industry as to the nature of financial modeling: is a tradecraft (welding) or a science (metallurgy)? That it is seldom taught within MBA programs suggests some lean to the former position, and a clear distinction with the academic pursuit of financial analysis. Overall it may be generally on point to define:

Financial modeling is the trade skill required to produce a tool for financial analysis.

This definition also focuses the topic on aspects of financial modeling that relate to craft experience: the importance of simplicity for a durable design; learning as much from the experience and lessons-learned of predecessors in the craft more than academic works, rigorous attention to mind-numbing detail that adds up in the ultimate product, etc.

There are non-spreadsheet software platforms available on which to build financial models. However, the vast proportion of the market is spreadsheet-based, and within this market MS Excel now has by far the dominant position. From this it is easy to see how the uninformed can equate Financial modeling competency with 'learning Excel'. However, the fallacy in this contention may be one area on which professionals in the financial modeling industry might agree.

Selected areas of financial modeling application


Selected books

  • Ongkrutaraksa, Worapot (2006). Financial Modeling and Analysis: A Spreadsheet Technique for Financial, Investment, and Risk Management, 2nd Edition. Frenchs Forest: Pearson Education Australia. ISBN 0-733-98474-6.
  • Swan, Jonathan (2008). Practical Financial Modelling, 2nd Edition. London: CIMA Publishing. ISBN 0-750-68647-2.
  • Vladimirou, Hercules (2007). Financial Modeling. Norwell, MA: Springer. ISBN 0-585-13223-2.
  • Jondeau, Eric (2007). Financial Modeling Under Non-Gaussian Distributions. London: Springer. ISBN 1-846-28419-9. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Benninga, Simon (2006). Principles of Finance with Excel. New York: Oxford University Press. ISBN 0-195-30150-1.
  • Swan, Jonathan (2005). Practical Financial Modelling. London: CIMA Publishing. ISBN 0-750-66356-1.
  • Fabozzi, Frank J. (2004). Financial Modeling of the Equity Market: From CAPM to Cointegration. Hoboken, NJ: Wiley. ISBN 0-471-69900-4. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Tjia, John (2003). Building Financial Models. New York: McGraw-Hill. ISBN 0-071-40210-1.
  • Benninga, Simon (1997). Financial Modeling. Cambridge, MA: MIT Press. ISBN 0-585-13223-2.

See also

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