What is a key output of financial modeling?

A forecast of future financial performance is a key output of financial modeling because it involves the systematic representation of the financial aspects of a business. Financial models are constructed using historical data and assumptions about future variables, such as revenue growth, costs, and market conditions. By analyzing these elements, the model can project financial statements, including income statements, balance sheets, and cash flow statements, for various scenarios.

This forecast serves as a valuable tool for decision-making, helping stakeholders, including management and investors, to evaluate the potential financial outcomes of business strategies or operational changes. It can also assist in assessing the viability of projects, determining funding needs, and planning for growth.

In contrast, stakeholder analysis, a company’s investment strategy, and reports on market share focus on other aspects of business strategy and market position rather than directly projecting financial outcomes, which is the primary focus of financial modeling.