What Is Financial Modelling? Types, Uses and Skills Explained
Financial modelling is building a spreadsheet representation of a business’s finances: its revenue, costs, assets, debt and cash. You use it to forecast performance and test decisions. A good model takes clearly labelled assumptions (growth, prices, costs) and flows them through linked financial statements to answer questions such as “Can we afford this hire?”, “What is this company worth?” or “How much debt can we take on?”
Key takeaways
- A model turns assumptions into forecasts, so the quality of the assumptions matters most.
- The three-statement model is the foundation; most other models build on it.
- Excel is the standard tool, and clean structure matters as much as formulas.
- Modelling is tested in finance interviews through case studies.
The main types of financial model
| Model | Question it answers | Typical users |
|---|---|---|
| Three-statement model | How will the income statement, balance sheet and cash flow evolve? | FP&A, analysts, founders |
| DCF (discounted cash flow) | What is the business worth today based on future cash? | Equity research, M&A, investors |
| Budget and forecast | What will we earn and spend next year? | FP&A, management |
| Comparable companies | What are similar companies valued at? | Banking, research |
| LBO (leveraged buyout) | What return does a debt-funded acquisition generate? | Private equity |
| M&A / merger model | Does buying this company add value per share? | Investment banking |
| Startup / SaaS model | How do customers, churn and pricing drive cash runway? | Founders, VCs |
| Project finance | Can this infrastructure project repay its debt? | Lenders, energy, infrastructure |
The two to learn first are the three-statement model and DCF valuation.
How a financial model is structured
- Inputs and assumptions: growth rates, margins, prices and costs, kept in one place and clearly marked.
- Calculations: revenue build, cost schedules, depreciation, debt and working capital.
- Outputs: the three statements, key metrics, valuation, and charts.
- Checks: balance sheet balances, cash ties out, and errors are flagged.
Good practice: one formula per row, no hard-coded numbers inside formulas, and a consistent colour code (for example blue for inputs, black for formulas).
Skills you need
- Accounting basics: how the three statements link
- Excel fluency: see Excel skills for finance jobs
- Business understanding: what actually drives revenue and cost in a given industry
- Judgement: whether an assumption is realistic
- Communication: explaining what the model says and how sensitive it is
Who uses financial modelling in their careers?
- FP&A analysts build budgets and forecasts.
- Investment bankers build valuation and merger models.
- Equity researchers forecast companies and value shares.
- Founders model runway and fundraising.
- Consultants model business cases for decisions.
For credentials that complement modelling skills, see finance and business certifications compared.
Learn financial modelling live
Tutopiya is planning a 10-week live Financial Modelling & Valuation cohort (intermediate level). You’d build a three-statement model and a DCF with feedback from a practising finance professional. It isn’t running yet. Join the financial modelling waitlist. There’s nothing to pay.
Sources
Frequently asked questions
What is financial modelling in simple terms? +
Financial modelling is building a spreadsheet that represents how a business makes and spends money, so you can forecast its future performance and test decisions such as raising prices, hiring, investing or buying another company.
Do I need an accounting background for financial modelling? +
You need to understand the three financial statements (income statement, balance sheet, cash flow statement) and how they link. A full accounting qualification is not required, but basic accounting knowledge is essential.
What software is used for financial modelling? +
Microsoft Excel is the industry standard. Google Sheets is used in some startups, and specialised planning tools exist, but interviews and most real-world models still use Excel.
Who uses financial models? +
Investment bankers, equity researchers, private equity and venture capital investors, corporate finance and FP&A teams, startup founders, consultants and lenders.
Founding cohorts · nothing charged
Want to learn this live, with a mentor?
Tutopiya is planning small, mentor-led online cohorts in English test prep, data & AI, business & finance and digital careers. Tell us which one you want. The programmes with the most interest open first, and the people on the waitlist hear about them first.
See the planned programmesWritten by
Tutopiya Careers Desk
Professional courses & career skills research · Tutopiya
The Tutopiya team researching which professional and certificate programmes to build next. We have taught live online since 2015. These guides answer the questions our waitlist asks most, with sources linked so every claim can be checked.
Related Articles
ACCA Qualification Structure Explained: All 13 Exams, Levels and Requirements
The ACCA qualification structure explained: all 13 exams across Applied Knowledge, Applied Skills and Strategic Professional, plus ethics and PER.
ACCA vs CIMA vs CPA: Which Accounting Qualification Is Right for You?
ACCA vs CIMA vs CPA compared on focus, recognition by country, exams and experience requirements, so you can choose the right accounting route.
Agile vs Waterfall: Differences, Pros and Cons, and When to Use Each
Agile vs waterfall explained: how each approach plans and delivers work, pros and cons, when each fits, and how hybrid project management combines them.