The uses and benefits of financial models

There are a number of explicit benefits related to financial modeling, but the really important benefits are implicit and imbedded within the executive decision making process.

1. Increase the breadth of analysis leading to decision making: In evaluating capital expenditure decisions or a profit plan, it is common to consider only a few alternate strategies because of the limiting factors cost and time. Financial model reduces both of them. Decisions that might have been based on to 3-4 cycles of analysis might now be predicted on 30-40 cycles of analysis 2. Provide a framework for long-range planning: A financial model provides a focal point for structuring the planning process.Models provide quick answers to things that may take months to actually happen. Automatic recalculation means that if a change is made in the model then all related formulae and values change. 3. Evaluating new forms and uses of financial information: Because of the flexibility inherent in modeling and the ability to evaluate the impact of various financial factors on profits, it is used as an experimental lab for testing and evaluating new accounting approaches. 4. Tool for special problems: More attention is being devoted by management to one time or temporary problem situation, because they are not of continuing nature, it is not practical to develop typical data processing system for these problems. Some recent applications in this area relate to Wage price control.

 Change in tax laws. Exchange rate. Mergers and acquisitions. 5. Understanding the inherent logic of the financial system: Models try and minimize financial risk, as you know if you do this' then 'this is likely to happen

Other benefits: Graphs can be produced to help understand the result: these will automatically change as any values are added. The model can be shared between different people in different locations. They provide consistent results - the same inputs will always produce the same answer. So a decision to 'make that loan' to a customer by a finance employee does not depend on how that person is feeling that day. With the business facing the conflicting forces of energy crisis, environmental constraints, executive management must look for new ways to evaluate alternate course of action and their impact on profitability. Financial modeling may provide management with important tool for dealing with increase complexities and uncertainties faced by industries.