What are Financial Modeling Limitations?
The main financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and 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)WACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator, (4) the propensity of Excel modelsDocumenting Excel Models Best PracticesWhen working on large and complicated financial models in Microsoft Excel, it can be quite challenging to document them clearly for the users’ ease of use and understandability. We will discuss here several Excel models best practices and other useful tips and tricks that users can apply to maintain and audit your 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.
