financial model

Definition

Mathematical representation of key financial and operational relationships. Comprising of one or several sets of equations, it is used in analyzing how a business will react to different economic situations or events, and in estimating the outcome of financial decisions before committing any funds. A financial model generally includes cash flow projections, depreciation schedules, debt service, inventory levels, rate of inflation, etc. It may also quantify the financial impact of the firm's policies, and of restrictions or covenants imposed by investors and/or lenders. A cash budget (whether computed by hand or with a spreadsheet program) is a basic financial model.