Financial Modeling Key Terms

Know key concepts used in financial modeling
By Terri Deno 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.
 

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