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Financial Modeling Limitations

What are Financial Modeling Limitations?

The main financial modeling limitations include: (1) the heavy use of assumptions about the future, (2) the heavy reliance on a terminal value that makes up so much of the net present value of a business, (3) the reliance on weighted average cost of capital (WACC), (4) the propensity of Excel models to contain errors that can not be easily found, and (5) the inability to reliably predict what is going to happen in the future. Despite these limitations, financial models can still be used as a planning tool to evaluate a range of potential outcomes.

 

Financial Modeling Limitations

Additional Questions and Answers

CFI is the official global provider of financial modeling and valuation analyst FMVA Designation. CFI’s mission is to help anyone become a world-class financial analyst and has a wide range of resources to help you along the way.

In order to become a great financial analyst, below are some additional questions and answers for you to explore further:

  • What is are the types of financial models?
  • What is sensitivity analysis?
  • What is bookkeeping?
  • What are the most common valuation methods?

Example Excel Model

Below is a screenshot from one of CFI’s online analyst training and certification courses, offered 100% online.

To learn How to Build an Excel Model step-by-step, click on the image below.

Analyst Certification Program