The case for financial modeling as an important management tool


Financial modeling is pertinent in an organization:

If you ask me today what skill in the corporate world is most sought after, I would not even take a minute more to tell you that it is the skill of financial modeling. It has over the past five years assumed so much importance because it has the ability to be able to analyze what is not just seen coming but also to be able to make the organization ready for any kind of eventualities.

Financial modeling in a nutshell:

In the simplest of terms, financial modeling can be explained to be an art (or perhaps a science!) of building such dynamic tools that can be useful in predicting future changes and evaluating corporate investment opportunities. It can help in anticipating the strengths and the weaknesses of a corporate and aid it in mergers and acquisitions, raising capital of the company, etc.

Financial modeling has been a pivotal tool in helping to assess a company history and be able to forecast its performance in terms of its finance, its organizational skills and various other departments therein.

The significance of financial modeling:

Companies often lose out on capitalizing on important occasions because of the doubts that they have on their organizational processes. These doubts can be abysmal. A financial analyst who can use his financial modeling skills to the hilt can help the top and the middle management of the organisation analyze the various possibilities in a given business scenario and help take a decision that will ensure that there is minimal risk and a maximum output may be in terms of sales or production or whatever it is that the company specializes in.

Here is a list of applications of financial modeling:

  1. Financial modeling is an effective management tool that can help arrive at game-changing decisions in the most cost-effective way;
  2. It has often been called as the proactive approach of making a creative representation of the corporate status quo;
  3. It is the mathematical representation of the economic performance of the company and is extremely helpful as a tool for analysis and appraisal of the company’s rules and policies.

An indispensable tool in decision making:

Financial modeling as such is used across the board in industries such as investment banks, credit rating agencies, equity research, mutual fund companies, financial outsourcing companies, project financing companies, etc.

I cannot stress its importance enough. A candidate with the requisite skills of modeling stands a much better chance at grabbing a great opportunity than the one without such a set of skills.