In finance, a simulation model is a method for creating a conceptual financial mockup, which consists of a set of mathematical formulas and interrelations that replicate the company’s responses to scale . These models enable flexible and integrated simulations of different company scenarios, such as sales volume simulations and their effects on revenue, inventory to calculate anticipated EBTIDA and cash flow . Financial modeling is useful in a variety of scenarios. It can aid in the making of investment decisions, the pricing of securities, and the planning of corporate transactions such as mergers, acquisitions, and divestitures .
There are many different kinds of financial simulation models, each of which has different purposes. Financial modeling should begin with a goal whether it be to understand how a decision will affect the business, determine if the future looks bright, or pursue any other business objective . Some common types of financial models include:
– Three-statement model
– Discounted cash flow (DCF) model
– Merger model (M&A)
– Initial public offering (IPO) model
– Leveraged buyout (LBO) model
– Sum of the parts model
– Consolidation model
– Budget model
– Forecasting model
– Option pricing model