Computers & Modeling

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Financial Modeling & Business Planning > Computers & Modeling

By means of a computer and suitable software, a mathematical model of a business's finances can be constructed to help prepare its financial projections. A computer-based model reduces the tedium of carrying out numerous repetitive calculations and simplifies the alteration of assumptions and the presentation of results.

Financial models are used to compile forecasts and budgets; to assess possible funding requirements; and to explore the likely financial consequences of alternative funding, marketing or operational strategies. 

A model utilizes assumptions on sales volumes, prices, operating costs, funding etc., to produce projected balance sheets, income statements and cashflow statements. Typically, it makes monthly projections for the first year and less detailed projections for the following years. 

A model, like Exl-Plan, can handle most types of variables normally encountered in financial planning. It is the electronic equivalent of a book of reports. Each page (worksheet) contains variable descriptions in the left-hand column, titles along the top, and, in the middle, space for inputting hundreds of assumptions and holding thousands of formulae. The computer's screen serves as a small window on this electronic book as illustrated in the following simplified diagram.

Note that the left-hand column and upper title rows are frozen and stay in view when scrolling around the model.
a = assumptions     f = formulae

Because a model is fully-integrated, resides in the computer's memory and all its assumption variables are linked by formulae, a change to any assumption will alter all dependent values throughout the model when it next recalculates. For example, a change to an interest rate in the third month of the first year will have an impact on the projections for the remaining months of that year and throughout the following years.

See Also:

Uses of a Model

Preparing to Plan

Pitfalls & Dangers

Very Quick Start

Getting Started with Exl-Plan

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