What is Financial modeling

Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation.This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or a portfolio, of a business, a project, or any other investment. Financial modeling is a general term that means different things to different users; the reference usually relates either to accounting and corporate finance applications, or to quantitative finance applications. While there has been some debate in the industry as to the nature of financial modeling – whether it is a tradecraft, such as welding, or a science – the task of financial modeling has been gaining acceptance and rigor over the years. Several scholarly books have been written on the topic, in addition to numerous scientific articles.

Accounting

In corporate finance, investment banking and the accounting profession (and generally in Europe, financial modelling is largely synonymous with cash flow forecasting.This usually involves the preparation of detailed company specific models used for decision making purposes;see Financial analyst. Applications include:

Quantitative finance

In quantitative finance (and generally in the U.S., financial modelling entails the development of a sophisticated mathematical model. Models here deal with asset prices, market movements, portfolio returns and the like. Applications include: