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Types of Financial Models that can save millions for your organisation and will create value

Updated: Feb 26

The applications of the financial models are taking new dynamics with more data available with companies both internally and externally. Traditionally, the financial models were built on a fairly simple assumptions based on historical trends blended with expected future. However, with the rise of big data, the challenges and opportunities have taken a new level.

Let me explain you few varieties of models which can save and generate millions by reducing the cost and increasing the income of your company respectively. These models drive efficiency and aids in decision making.

The objective for each of the below models are different and the high level of big data can be integrated using advanced statistical tools. The models can play different roles for various departments in the organisation.

· Fund raising – Helps determine the amount of investment to fuel the expansion of your business and manage the risk-reward of the lenders, equity contributors, preference equity holders, convertible bond holders, and private credits.

· Capital Allocation – Comprehend the commercial viability, return on investments for various project/s with detailed understanding of the revenue and the cost. Also, calculate the fund allocation among several asset classes to achieve your desired rate of return and diversification.

· Restructuring and Refinancing – Liaise with bankers and/or creditors for restructuring possibilities by revamping the business model, selling non-profitable business units and venture into new opportunities. Restructuring revives business model with new vision and organisation structure focussing on brighter future of organisation.

· Risk Based – There are few industries which are heavily regulated (for example Banking, Insurance) and have high accountability for public. Several risk-based models manage the exposures to complex derivatives, ensures adequate capital for deposit holders and more.

· Inorganic growth – For mature companies, there are opportunities to integrate within supply chain either horizontally and/or vertically. These can be done with mergers, joint ventures and acquisitions. This is a common approach among big technology companies who benefits from integrating emerging technologies with their existing infrastructure.

· Organic growth – Evaluate the growth potentials in new markets, with new products and/or in new segments. Consider possibility of launching into different geographies with new strategies and business model.

· Valuation of Business – A dynamic financial model will help investors derive the intrinsic value of the business and determine the expected rate of return by investing in the business.

· Credit Models (Predict the default rates, estimated loss and cash recoverability) – Manage the trade receivables and/or loan assets to maximise the future recovery over the horizon period. These models also give opportunity to monitor the portfolio and avoid any losses from potential defaults.

· Credit Limit Models – This forms part of managing credit risk where the financial strength of customer is evaluated to determine the range of credit limits to be extended. Depending on the risk appetite of company, the trade credit limit can be extended or decreased for specific clients.

· FP&A Budgeting and Forecasting – Monitor the targets/performance of your organisation and evolve the strategy continuously to achieve the income levels.

· Selling or Divesting Assets and Business Units – Evaluate selling assets or those business units which are not profitable or doesn’t align with goals of organisation. If the assets are at highest market valuation, consider the possibility of sale and lease back.

The list is endless with any algorithm or a viable methodology that can be put into application forms a model. To add value, a modeller must be clear with the objective and must understand the relationship between key drivers of the businesses. At times, these models can be very Industry specific for example, Healthcare, Oil & Gas, Renewables and Aviation Finance. In the next few article, we will explore each of these models in greater detail.


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