The growth of a business and its future existence lies in the decisions that it makes on a daily basis. Financial decisions are the most crucial ones as it is through these decisions the revenue of the firm depends. Therefore, each firm follows a technique quite unique from the rest. Proper allocation of resources, the efficiency, and productivity of the firm are affected by the financial decisions that are taken.
This article will comprehensively deal with the ways by which the techniques of Financial Modeling aid the firm to make informed decisions.
Model of Monte Carlo Simulations
The Concept: It refers to the very random analysis of sampling methods to draw insights about the matters pertaining to upcoming risk, and numerous possibilities of the prospective outcomes of the firm.
Usage: Using this technique, the firm is aware of the possible threats, and also predicts the change in market situations that might affect their business.
Mergers and Acquisitions Model [M&A]
- The Concept: This technique analyses the various aspects related to mergers of companies or acquisitions.
- Usage: With the analysis of the technique, the firm rethinks its decision to merge or acquire. With a variety of interpretations in hand, it becomes easier for the firm to make decisions in terms of finance.
Budget Model
The Concept: Budget forms a firm’s crucial part when it comes to managing business operations. Every year, a well-planned budget is laid which is to be followed for the upcoming year.
The Usage: This technique enables the firm to keep track of its laid budget, thereby not exceeding the plan. Therefore, the firm now can focus on other areas for improvement and the growth of the business. Thus, there is a scope for the financial stability of the firm.
Dynamic Finance Model
The Concept: With the markets always changing, the firm needs to keep up with the changes.
The Usage: This technique of Financial Modeling is a crucial one for the firm to follow. The firm by analyzing the changes that are occurring in the market, formulate such decisions that cater to the needs of the change. The firm, thus, adjusts its finances depending on the market situation.
Scenario Analysis and Sensitivity Analysis
- The Concept of Scenario Analysis: This technique mainly relates to the making of such models that speculate the firm’s future on various phases, such as the best phase, worst, and normal phase and how these can possibly affect the financial domain of the firm.
- The Concept of Sensitivity Analysis: This analysis pertains to the impact that the finance of the firm would face when specific elements change such as labor cost, maintenance cost, or the cost of the resources.
- The Usage: The firm, by using these techniques would easily interpret the abrupt changes that occur in the supply and demand.
Conclusion
The firms, as per their needs, use various Financial Modeling techniques to make informed decisions. Through the use of these acquired raw data, the firm eventually laid out strategic measures to deal with the abrupt changes in market behavior.
