FINLANDIA SCHOOLFINANCIAL MODEL AND SCENARIO
A Financial model is spreadsheet-based simulation of a real world financial situation. It uses a set of inputs(assumptions) to calculate a set of outputs(forecast), allowing a user to see how a change in an assumption affects the outcome.
Purpose of financial modelling
1. Forecasting: predicting future revenue, profit or cash flow
2. Budgeting: Planning for a company's or project's expenses
3. Decision making: determining the financial viability of a new project
Key principles of good modelling
1. Assumption driven: All key inputs should be in seperate, clearly labelled cells
2. Flexible: should be easy to update
3. Clear and simple: easy to understand, with clear labels and formatting.
Example:
Assumption Section
price per unit=#1,000
cost per unit = #400
unit sold = 500
calculation section (the model)
Revenue= price per unit*units sold(=500,000)
Cost of Goods sold (COGS) =cost per unit*units sold(=#200,000)
Gross profit = Revenue-COGS (=300,000)
SCENERIO ANALYSIS & "WHAT IF"
This is the process of testing how a model's outputs changes when one or more of the inputs are changed.
PROCESS
1. Click "Add" to create a scenario
2. Select the "changing cells"
3. Enter the values for that scenario
4. Repeat for "worst case"
5. You can now instantly toggle between these scenarios to see the profit change
THE 'GOAL SEEK' TOOL
This is a "what if" analysis tool that works backward. You specify the desired result and Goal seek finds the input value required to achieve it.
How to use Goal Seek
1. Set cell: the cell containing your final formula
2. To value: the numerical goal you want to achieve
3. By changing cell: The one assumption cell you want Excel to change