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.
