Financial Modeling Software

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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 to study and examine the response of business in various favorable and unfavorable situations, evaluate the monetary implications of it well in advance, and arrive at conclusions for the best interest of the business in any given circumstances whether planned or unplanned.

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.read more software are 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:

  1. Exceptional Calculation Performance: The software makes complex calculations straightforward and can be quickly interpreted per the requisite business needs. These calculations are mostly error-free and keep the assumptions of present economic conditions intact, thus guiding better decision-making.
  2. 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. The software is also developed with various inbuilt security and controls to maintain data secrecy. This gives an upper hand advantage ahead of others in the market.
  3. Enterprise Accessibility: This software is developed in such a way that it provides easy-to-access secured data and reports anywhere in the world to the users and customers of the firm. It also helps to merge other operational models with financial models for better analysis.
  4. Huge Database: The software provides a platform that helps the firm store data and prepares as many models as required without the fear of data being lost or stolen.
  5. Time Efficient: This software interprets and analyses any form of data in less time than manual workings. This resulted in an added advantage compared to time-consuming traditional reporting methods.

Examples and Types of Financial Modeling Software

Financial-Modelling-Software

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Financial Modeling Software (wallstreetmojo.com)

Many IT companies worldwide are working day and night to develop software with the latest technologies to outperform rival corporations and meet diversified business needs. Some of the financial modeling software that is available in the market are the following:

  1. Oracle BI – developed by Oracle, provides end-to-end solutions for the financial supply chain.
  2. Business Objects – developed by SAP, helps to analyze business intelligence data.
  3. Hyperion – developed by Oracle, helps in financial management.
  4. Operis – is an advisory that provides help and support for all business needs.
  5. IBM Cognos – developed by IBM, which integrates business intelligence activities.
  6. Quantrix –  Professionals use it 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.read more.

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:

Application-of-FMS

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Financial Modeling Software (wallstreetmojo.com)

#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. read more prediction is an essential component of analyzing the going concern principle of an organization. The cash statement is nothing but a report that exhibits 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 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.read more, 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.read more, 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.read more, profitability indexProfitability IndexThe profitability index shows the relationship between the company projects future cash flows and initial investment by calculating the ratio and analyzing the project viability. One plus dividing the present value of cash flows by initial investment is estimated. It is also known as the profit investment ratio as it analyses the project's profit.read more, etc. These techniques could take a lot of time 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 determine the probable threats involved in a portfolio. The techniques used to develop a financial model are very time-consuming and involve 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.read more, value at risk, historical simulation with fewer resources, and fewer efforts.

#4 – Option Pricing

Option pricingOption PricingOption pricing refers to the process of determining the theoretical value of an options contract. read more 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.read more. The Black – Scholes model, Monte Carlo methods, and financial models are used in these calculations.

#5 – Algorithmic Trading

Recently, this concept has been developed to use computers and software for automated programs. 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 necessary to execute this because a human can never reach the speed of the system to finish this.

Conclusion

Financial modeling software is one of the few things on which both the corporates and government entities are dependent, 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 can potentially 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.read more multi-folds and hence improve an organization’s long-term sustainability.

Recommended Articles

This has been a guide to Financial Modeling Software. Here we discuss features, top 5 examples of financial modeling software, and applications. You can learn more about it from the following articles –