Types of Financial Models (2024)

The 10 most common types of financial models

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Written byJeff Schmidt

There are many different types of financial models. In this guide, we will outline the top ten most common models used in corporate finance by financial modelingprofessionals.

Here is a list of the ten most common types of financial models:

  1. Three-Statement Model
  2. Discounted Cash Flow (DCF) Model
  3. Merger Model (M&A)
  4. Initial Public Offering (IPO) Model
  5. LeveragedBuyout (LBO) Model
  6. Sum of the Parts Model
  7. Consolidation Model
  8. Budget Model
  9. Forecasting Model
  10. Option Pricing Model

Key Highlights

  • The ten most common financial models are used by investment bankers, research analysts, private equity professionals and other corporate finance professionals.
  • You can download many of our pre-built templates to upskill your financial modeling capabilities.
  • The key to being able to model effectively is to have good templates and a solid understanding of accounting and corporate finance.

Types of Financial Models (1)

Examples of Financial Models

To learn more about each of the types of financial models and to perform detailed financial analysis, we have laid out detailed descriptions with relevant screenshots below. The key to being able to model effectively is to have good templates and a solid understanding of corporate finance, ascovered in our courses.

Types of Financial Models (2)

If you’d like to have the templates, you can alwaysdownload our financial models.

1. Three-Statement Model

The three-statement modelis the most basic setup for financial modeling. As the name implies, the three statements (income statement, balance sheet, and cash flow) are all dynamically linked with formulas in Excel. The objective is to set it up so all the accounts are connected and a set of assumptions can drive changes in the entire model. It’s important to knowhow to link the three financial statements, which requires a solid foundation of accounting, finance and Excel skills. Learn the foundations in ouronline financial modeling courses.

Here is a screenshot of the balance sheet section of a three-statement single worksheet model. Each of the other sections can easily be expanded or contracted to view sections of the model independently. See our free webinar on how to build a three-statement model.

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Learn more: Download CFI’s three-statement financial model.

2. Discounted Cash Flow (DCF) Model

TheDCF model builds on the three-statement model to value a company based on the Net Present Value (NPV) of the business’s future cash flow. The DCF model takes the cash flows from the three-statement model, makes some adjustments where necessary, and then uses the XNPV functionin Excel to discount the cash flows back to today at the company’s Weighted Average Cost of Capital (WACC).

Thesetypes of financial models are used inequity researchand other areas of the capitalmarkets.

Here is a screenshot of the discounting cash flows section in a DCF model. In this section, the cash flows that were calculated above are being discounted by the calculated WACC. See ourguide to DCF models.

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Learn more:Download the DCF model template.

3. Merger Model (M&A)

The M&A model is a more advanced model used to evaluate the pro forma accretion/dilution of a merger or acquisition. It’s common to use a single tab model for each company, where the consolidation of Company A + Company B = Merged Co. The level of complexity can vary widely. This model is most commonly used ininvestment bankingand/orcorporate development.

Here is an example of anused to evaluate the impact of an acquisition. The M&A model is a more advanced type of financial model, as it requires making adjustments to create a Pro Forma closing balance sheet, incorporatesynergiesand terms of thedeal, and modelingaccretion/dilution, as well as performing sensitivity analysis, and determining the expected impact on valuation.

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Learn to build an M&A model step by step in CFI’s.

4. Initial Public Offering (IPO) Model

Investment bankers and corporate development professionals also build IPO models in Excel to value their business in advance of going public. These models involve looking atcomparable company analysisin conjunction with an assumption about how much investors would be willing to pay for the company in question. The valuation in an IPO model includes “an IPO discount” to ensure the stock trades well in the secondary market.

5. Leveraged Buyout (LBO) Model

Aleveragedbuyouttransaction typically requires modeling complicateddebt schedulesand is an advanced form of financial modeling. An LBO is often one of the most detailed and challenging of all types of financial models, as the many layers of financing create circular references and require cash flow waterfalls. These types of models are not very common outside ofprivate equityor investment banking.

Here is an example of an LBO model. As you see below, the LBO transactions require a specific type of financial model that focuses heavily on the company’s capital structure and leverage to enhance equity returns. Learn more aboutLBO transactionsandLBO models.

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Learn more: CFI’sLBO Modeling Course.

6. Sum of the Parts Model

This type of model is built by taking several DCF models and adding them together. Next, any additional components of the business that might not be suitable for a DCF analysis (e.g.,marketablesecurities, which would be valued based on the market) are added to that value of the business. So, for example, you would sum up (hence “sum of the parts”) the value of business unit A, business unit B, and investments C, minus liabilities D to arrive at the Net Asset Value for the company.

7. Consolidation Model

This type of model includes multiple business units added into one single model. Typically, each business unit has its own tab, with a consolidation tab that simply sums up the other business units. This is similar to a Sum of the Parts exercise where Division A and Division B are added together and a new, consolidated worksheet is created. Check out CFI’s free consolidation model template.

8. Budget Model

This is used to model finance for professionals in (FP&A) to get the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.

9. Forecasting Model

This type is also used in financial planning and analysis (FP&A) to build a forecastthat compares to the budget model. Sometimes the budget and forecast models are one combined workbook and sometimes they are totally separate.

Learn more: See a step-by-step demonstration of how to build a forecast model.

10. Option Pricing Model

The two main types of option pricing models are binomial tree and Black-Scholes. These models are based purely on mathematical formulas rather than subjective criteria and, therefore, are more or less a straightforward calculator built into Excel.

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I won't waste time with pleasantries; let's dive into the financial modeling concepts outlined in the article you provided. My expertise in finance allows me to break down and provide insights into each of the ten most common types of financial models mentioned.

  1. Three-Statement Model:

    • This is the foundational model that interconnects the income statement, balance sheet, and cash flow statement. It requires a deep understanding of accounting, finance, and Excel skills. The goal is to link these statements dynamically, allowing assumptions to drive changes throughout the model.
  2. Discounted Cash Flow (DCF) Model:

    • Building upon the three-statement model, the DCF model values a company based on the Net Present Value (NPV) of its future cash flows. It involves adjustments and uses the XNPV function in Excel to discount cash flows back to present value at the Weighted Average Cost of Capital (WACC). This type of model is widely used in equity research and capital markets.
  3. Merger Model (M&A):

    • A more advanced model used in evaluating the pro forma accretion/dilution of a merger or acquisition. It requires creating a Pro Forma closing balance sheet, considering synergies, deal terms, modeling accretion/dilution, performing sensitivity analysis, and determining the expected impact on valuation. It's commonly utilized in investment banking and corporate development.
  4. Initial Public Offering (IPO) Model:

    • Investment bankers and corporate development professionals use IPO models to value a business before going public. These models involve comparable company analysis and assumptions about investor willingness to pay. An "IPO discount" is applied to ensure the stock trades well in the secondary market.
  5. Leveraged Buyout (LBO) Model:

    • An advanced model used in leveraged buyout transactions, often detailed and challenging. It involves modeling complicated debt schedules, circular references, and cash flow waterfalls. LBO models are prevalent in private equity and investment banking.
  6. Sum of the Parts Model:

    • Built by combining several DCF models and adding other business components. It sums up the value of different business units and additional assets to arrive at the Net Asset Value for the company.
  7. Consolidation Model:

    • Involves combining multiple business units into a single model, each with its own tab. The consolidation tab sums up the values of the individual business units. Similar to a Sum of the Parts exercise but on a larger scale.
  8. Budget Model:

    • Used by finance professionals in Financial Planning and Analysis (FP&A) to create budgets for the coming year(s). It focuses heavily on the income statement and is designed for monthly or quarterly figures.
  9. Forecasting Model:

    • Also used in FP&A, this model builds a forecast that can be compared to the budget model. It may be a separate workbook or combined with the budget model.
  10. Option Pricing Model:

    • Mainly based on binomial tree and Black-Scholes models, these mathematical formulas provide objective calculations for pricing options. They are often integrated into Excel for straightforward use.

Feel free to explore further or ask specific questions about any of these financial modeling concepts.

Types of Financial Models (2024)
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