What is Financial Modeling Software?
Financial Modeling Software refers to a program or operating system designed in a way that portrays the relationship between finance and operation in order to study and examine the response of business in various favorable and unfavorable situations, evaluate the monetary implications of it well in advance and to arrive at conclusions for the best interest of the business in any given circumstances whether planned or unplanned.
There are various types of financial modelingFinancial ModelingFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact. software available in the market based on the specific needs of accounting, corporate finance, quantitative finance, or any other lines of business.
Features of Financial Modeling Software
The feature of financial modeling software are as follows:
- Exceptional Calculation Performance: The software makes complex calculations easy and straightforward, which can be quickly interpreted as per the requisite business needs. These calculations are mostly error-free and keep the assumptions of present economic conditions intact, thus guiding in better decision making.
- Next-Generation Business Plan: The software provides firms and analysts with various economic, financial, and operational scenarios, thus giving an insight into future business standards and planning. This gives an upper hand advantage ahead of others in the market. The software is also developed with various inbuilt security and controls to maintain data secrecy.
- Enterprise Accessibility: This software is developed in such a way that it provides an easy to access the secured data and report anywhere in the world to the users as well as customers of the firm. It also helps to merge other operational models with financial models for better analysis.
- Huge Database: The software provides such a platform that helps the firm store any amount of data and prepare as many numbers of models as required by the firm without the fear of data being lost or stolen.
- Time Efficient: This software interprets and analyses any form of data in very less time as compared to manual workings. Thus, resulting in an added advantage as compared to time-consuming traditional ways of reporting.
Examples and Types of Financial Modeling Software
Many IT companies worldwide are working day and night to develop software with the latest technologies to outperform rival corporates and meet diversified business needs. Some of the financial modeling software that is available in the market are the following:
- Oracle BI – developed by Oracle, provides end to end solutions for the financial supply chain.
- Business Objects – developed by SAP, helps to analyze business intelligence data.
- Hyperion – developed by Oracle, helps in financial management.
- Operis – It is an advisory that provides help and support for all business needs.
- IBM Cognos – developed by IBM, which integrates business intelligence activities.
- Quantrix – It is used by professionals to develop future planning, estimation, and budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time..
Applications of Financial Modelling Software
The applications of financial modeling software are used in various levels of the organization falling under the categories of purchase, material, human resource, accounting, controlling, finance, reporting, etc. Some of these applications are as follows:
#1 – Cash Flow
Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. prediction is an essential component to analyze the going concern principle of an organization. The cash statement is nothing but a report that exhibit the financial strength and stability of the company based on available assets and liabilities awaiting to be discharged from the company.
#2 – Capital Budgeting
It is an estimation process to ascertain whether the assets or investments of the company are to be financed through debt or own funds. This process uses various techniques such as net present valueNet Present ValueNet Present Value (NPV) estimates the profitability of a project and is the difference between the present value of cash inflows and the present value of cash outflows over the project’s time period. If the difference is positive, the project is profitable; otherwise, it is not., internal rate of returnInternal Rate Of ReturnInternal rate of return (IRR) is the discount rate that sets the net present value of all future cash flow from a project to zero. It compares and selects the best project, wherein a project with an IRR over and above the minimum acceptable return (hurdle rate) is selected., payback periodPayback PeriodThe payback period refers to the time that a project or investment takes to compensate for its total initial cost. In other words, it is the duration an investment or project requires to attain the break-even point., profitability index, etc. These techniques could take a lot of time if done manually, whereas the software provides a solution in minutes and gives an error-free report.
#3 – Financial Risk Modeling
It is a method that uses combinations of mathematics, arithmetic, and economics to find out the probable threats involved in a portfolio. The techniques used to develop a financial model is very time consuming and involves a lot of assumptions with calculations. As an aid, financial modeling software shows results for market riskMarket RiskMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk., value at risk, historical simulation with fewer resources, and fewer efforts.
#4 – Option Pricing
Option pricing is nothing but calculating the correct price of an instrument of an entity like shares, debentures, etc. The calculations were based on assumptions related to intrinsic value and the time value of moneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.. Some of the financial models used in these calculations were the Black – Scholes model, Monte Carlo methods, etc.
#5 – Algorithmic Trading
This concept is developed lately to use computers and software for automated programs. Financial modeling software is necessary to execute this because a human can never reach the speed of the system to finish this. It is nothing but commands assigned to the computer to purchase or sell stocks in the share market when the desired criteria are met. The system automatically gets into the trade if desired criteria are satisfied based on existing market conditions.
Financial modeling software is one of the few things on which not only the corporates but even the government entities are dependent on, both explicitly and implicitly. The output of this analysis is helpful in forecasting demand leading to better utilization of current resources, maximizing productivity, and eventually better delivery to the end consumers. If used optimally, it has the potential to improve profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. multi-folds and hence to improve the long-term sustainability of an organization.
This has been a guide to Financial Modeling Software. Here we discuss features, top 5 examples of financial modeling software along with applications. You can learn more about from the following articles –