Financial model - an effective tool for decision-making

The financial model is a special document, which contains calculation of certain financial indicators of the company on the basis of information about the projected sales volume and planned costs. The main task of this model is to evaluate the effectiveness of using available resources.

Based on practice, the financial model includes calculating the revenue of the organization, taking into account the cost and natural parameters of sales, as well as purchases, production costs, production volumes, other revenues and expenses, investments, company liabilities and cash flow. The final stage in the construction of this model is the formation of the forecast balance, as well as budget revenues and expenditures. The purpose of this work is considered to be the determination of the values of the change in the financial result of an enterprise under any dynamics of parameters involved in these calculations.

The financial model is based on such a key principle as determining the barrier rate of return on capital. In other words, the identification of the minimum level of return on investment should be provided by a group of managers in the enterprise. It is her identification that will help to clearly formulate the requirements for the result.

The financial model is based on one more principle - the concentration of analysis at the liquidity level of the company's economic activities. This concept is directly related to focusing on the value of business for the founders.

The financial model of an enterprise can be defined in the form of a simplified mathematical representation of the real financial side of the firm's economic activities.

This definition of the model means that with its help, management makes an attempt to present the complex nature of some financial situation or a number of certain relationships in the form of simplified mathematical equations.

The financial model, like any economic category, has its purpose, which is to assist the head of the company in making a decision. More details about the purpose of such modeling can be considered in the study of some simple samples such as estimates, linear programming and analysis of the volume of production and profit.

As indicated above, the financial model provides guidance for the necessary analytical information, used as the basis for making more informed decisions. The specified information can be analyzed under two headings:

1. Achieve the goal. Using the financial model, the manager includes some data in the analytical image and, thus, receives a response, whether the results will contribute to the achievement of the goal set for the company. For example, for a manufacturing enterprise, profit maximization.

2. Risk analysis. This is an important element of the decision making process, which facilitates an instant analysis of the sensitivity of any solution.

It should be noted that the financial model is closely related only to the quantitative side of the decisions. With proper decision making, qualitative aspects must be taken into account, which are no less important than quantitative ones.