Creating a Revenue Model
February 12, 2025
In the previous article, we understood about how high-yield bonds have emerged as one of the biggest market segments in the fixed income securities market. However, before an investor decides to commit a part of their portfolio towards high yield bonds, they must be aware of the various types of advantages and disadvantages that these […]
Law Firms: Law firms all across the world practice job costing. Most law firms charge an hourly rate to their clients. This rate is derived on the basis of the same factors direct material, direct labour as well as overheads. In case of law firms, the direct material used is negligible. The majority of the […]
Globalization has led to increased competition. Artificial boundaries no longer stop competitors from entering markets and even dominating them. This is the reason that having a distinct and clear competitive advantage has become important for most organizations. However, a lot of companies do not have this competitive advantage. This is because competitive advantages do not […]
Apple is one of the largest manufacturers of mobile phones in the world. The company is the largest in the world and recently became the first one to cross the $1 trillion market capitalization mark. The company has been recently engaged in a quagmire with Qualcomm, which is one of its suppliers. Finally, Apple had […]
Opportunity cost of a capital is a term unique to economics and finance. It is unique in the sense that you will not find mention of opportunity cost of capital in the accounting books. It is not an explicit cost which is paid out of the pocket. Hence, there is no mention of this cost […]
Making assumptions is an integral part of every financial calculation. It is a known fact that if the assumptions are modified even slightly, the numbers on the model tend to change dramatically. The problem is that financial modeler is forced to make several assumptions while creating the model. When several of these assumptions are being made, it is important to create a mechanism which allows these assumptions to be managed in a coherent and easy to understand manner.
Financial modelers often do not pay attention to the management of assumptions. Since it does not involve any calculations, this is often thought to be an administrative task and is often delegated to the newest member of the team. However, the reality is that managing the assumptions is probably the most crucial task in the financial modeling process. In this article, we will explain why this task is important and also explain the mechanism which is used to manage this process.
There are several assumptions which have to be made during the process of financial modeling. If these assumptions are not properly documented, then they will remain in the mind of the modeler. As a result, people using the model and interpreting its results will have no idea where the results came from.
Several things can go wrong while documenting the assumptions related to a financial modeling project.
The reality is that financial modeling is about predicting the future. Everyone’s beliefs about the future are bound to be different. These beliefs are presented to the end-user using the assumptions database. If the user does not agree with the assumptions, they can change the calculation themselves.
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