Financial modeling is a way for businesses to analyze the future of current financial standings. In order to understand the process and concepts common to financial modeling, a person working with the model should have a good understanding of accounting and financial analysis. This gives a person the knowledge to interpret and analyze financial statements of a business to construct the financial model and helps to understand its possible outcomes.

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Absorption

Absorption refers to the costs that belong to a cost center in financial statements. Absorption is the process of these costs being shared among all products or services that use the cost center for financing.

I recommend: Accounting Coach offers a more detailed definition of absorption as well as links to related accounting information.

Assets utilization ratio

The assets utilization ratio in financial modeling is a ratio that measures the intensity of business assets available. The equation takes calculated sales over the net operating assets of a business to reach a percentage of net assets in operation.

I recommend: Financial Ratios gives an overview of all types of financial ratios common to financial modeling and offers examples on how to calculate the ratio.

Balance sheet

The balance sheet in financial modeling is a single financial statement that includes the total financial worth of a company. It lists the company's capital, liabilities and assets for any specified date.

I recommend: Investopedia offers information on how to read a balance sheet and how the balance sheet can be analyzed with a variety of asset ratios.

Capital

Capital is a broad term commonly used in financial modeling and other accounting subjects to refer to the whole quantity of a company's assets. Capital is the number of the assets less the company liabilities. Capital can also refer to money borrowed in order to pay for the day-to-day business operations.

I recommend: Wisegeek offers an expanded definition of what financial capital is and how the term is used for a variety of accounting topics.

Direct costs

Direct costs are the costs that a company incurs in order to purchase materials, labor and other expenses to keep the company working from day to day. Direct costs can always be traced to products, services and jobs within the company.

I recommend: Northern Illinois University offers information on direct costs as it pertains to the university itself.

Factoring

Factoring is a way that companies can improve their cash flow by selling debtors to a factoring company. Factoring companies can provide a company with a specific amount of capital for business, but factoring companies also offer other services that include credit-worthiness checks and debt-collection services.

I recommend: Small Business Television offers advice for small businesses to use the concept of factoring for raising cash to put back into the business.

Financial modeling is the act of creating a tool to forecast project, business and investment performance. To operate efficiently, a financial model must predict the outcome of several different probabilities and what-if scenarios. Financial models general include several financial documents including balance sheets, income and cash flow statements and other analytical reports detailing specific business operations.

Financial modeling information helps business owners clarify capital needs and provides a clear view of cohesive financial data useful for potential business investment ventures. Financial modeling can be performed by using advanced modeling software or the traditional pen and paper method. Consider the following to help you complete a financial model for your business:

1. Get a professional financial modeling consultation.

2. Obtain training for financial modeling.

3. Find financial modeling tools.

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Talk to a financial modeling consultant

A financial modeling consultant can assist you with performing necessary calculations and design custom strategies based on financial information. Financial consultants also help business owners analyze specific business activities and provide advice on how to resolve problems.

I recommend: Haywood Consulting Group provides business owners with professional financial modeling advice. Growthink is a financial modeling consultant offering expert-level business planning services.

Sign up for financial modeling training

A financial model is simply a spreadsheet that predicts a company's future revenue, cash flow and earnings. Sounds pretty simple, right? While the information included is basic, the preferred style and how the information is presented require skill and expertise in financial modeling. Financial modeling training will help you learn how to create usable financial models using easy-to-read and detailed charts and graphs. Both presentation types are generally required to effectively share all of the information included in financial models.

I recommend: The Analyst Exchange offers various financial modeling training enrollment options to fit your schedule. Wall St. Training provides hands-on classroom and online self-study programs for basic and advanced financial modeling.

Purchase financial modeling software

Financial modeling software takes you beyond the standard spreadsheets used to create financial models. Financial modeling software is designed to help business owners easily manipulate and analyze data, create new financial scenarios. Most software offers customization features that can be quickly integrated with your existing computer systems.

I recommend: Financial Modeling Guide offers extensive financial modeling information as well as help with financial modeling through various financial analysis templates and useful design tips. You can obtain a free financial modeling CD and technical kit from MathWorks, a leading financial modeling software provider.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Financial modeling is a great way to forecast profitability of a business venture before getting too deep into the business startup process. Avoid reinventing the wheel--save time and money by taking advantage of the variety of resources that offer basic financial modeling information and tools.