Financial modeling is the process of building a mathematical model that represents the performance of a financial asset or portfolio of a business, project, or any other financial situation. It is a numerical representation of some or all aspects of a companys operations, intended to be used as a decision-making tool. Financial modeling is used to estimate the valuation of a business, to compare businesses to their peers in the industry, and to test various scenarios for strategic planning.

Financial modeling can be divided into two main categories: accounting and corporate finance applications, and quantitative finance applications. In accounting and corporate finance, financial modeling typically entails financial statement forecasting, which is the preparation of detailed company-specific models used for decision-making purposes and financial analysis. In quantitative finance, financial modeling entails the development of a sophisticated mathematical model that deals with asset prices, market movements, portfolio returns, and the like.

Financial modeling is a complex and highly valued skill in finance, and it involves combining accounting, finance, and business metrics to create an abstract representation of a company in Excel, forecasted into the future. Financial models are used to estimate the valuation of a business or to compare companies to their industry competitors. There are many types of financial models with a wide range of uses, including discounted cash flow analysis, leveraged buyout, mergers and acquisitions, and sensitivity analysis.

To build a financial model, one needs to follow some best practices, such as keeping the model simple in presentation and rich in detail, using quality inputs and assumptions, and testing the models sensitivity to changes in assumptions. Financial modeling is a valuable tool for company executives, financial analysts, private equity investors, commercial and investment bankers, accountants, and other professionals.