What is the 3 model financial model?

A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements . The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.

What are the 4 major components of financial modeling?

Here we have the four major components of a financial model: Income Statement. Balance Sheet. Cash Flow Statement. Debt Schedule. Dec 6, 2023

What are the three most common financial modelling best practices?

Financial Modeling Best Practices Clarify the Problem and Set the Goal. A financial model should not contain the same assumptions or data twice, and it should be consistent from sheet to sheet. ... Keep the Model as Simple as You Can. ... Plan the Model Structure. ... Use Accurate Data and Protect Its Integrity. ... Use Dummy or Test Data.

What are the 3 major types of financial?

The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance .

What is a financial model example?

Examples of financial models may include discounted cash flow analysis, sensitivity analysis, or in-depth appraisal.

What are DCF and LBO?

DCF (Discounted Cash Flow) and LBO (Leveraged Buyout) models are two of the main types of financial models used by our clients within the Investment Banking sector .

Is a DCF a financial model?

What is a DCF Model? A DCF model is a specific type of financial modeling tool used to value a business . DCF stands for Discounted Cash Flow, so a DCF model is simply a forecast of a company's unlevered free cash flow discounted back to today's value, which is called the Net Present Value (NPV).

What are the financial planning models?

A Financial Planning Model is a framework that helps you identify how much money you need, what sources of income will be available, and the expenses you expect . This model is helpful for business owners, entrepreneurs, or anyone who wants to know how they can better plan their financial future.

What is the difference between LBO and DCF model?

I'll emphasize the word estimate here – a DCF model is theoretical by nature and includes many more assumptions than an LBO does, mainly an assumed discount rate . The LBO looks at how the free cash flow in the business can be used to cover the debt service when debt is used to finance the acquisition.

Types of Financial Models (2024)

The 10 most common types of financial models

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

Start Free

Written byJeff Schmidt

There are many different types of financial models. In this guide, we will outline the top ten most common models used in corporate finance by financial modelingprofessionals.

Here is a list of the ten most common types of financial models:

Three-Statement Model
Discounted Cash Flow (DCF) Model
Merger Model (M&A)
Initial Public Offering (IPO) Model
LeveragedBuyout (LBO) Model
Sum of the Parts Model
Consolidation Model
Budget Model
Forecasting Model
Option Pricing Model

Key Highlights

The ten most common financial models are used by investment bankers, research analysts, private equity professionals and other corporate finance professionals.
You can download many of our pre-built templates to upskill your financial modeling capabilities.
The key to being able to model effectively is to have good templates and a solid understanding of accounting and corporate finance.

Examples of Financial Models

To learn more about each of the types of financial models and to perform detailed financial analysis, we have laid out detailed descriptions with relevant screenshots below. The key to being able to model effectively is to have good templates and a solid understanding of corporate finance, ascovered in our courses.

If you’d like to have the templates, you can alwaysdownload our financial models.

1. Three-Statement Model

The three-statement modelis the most basic setup for financial modeling. As the name implies, the three statements (income statement, balance sheet, and cash flow) are all dynamically linked with formulas in Excel. The objective is to set it up so all the accounts are connected and a set of assumptions can drive changes in the entire model. It’s important to knowhow to link the three financial statements, which requires a solid foundation of accounting, finance and Excel skills. Learn the foundations in ouronline financial modeling courses.

Here is a screenshot of the balance sheet section of a three-statement single worksheet model. Each of the other sections can easily be expanded or contracted to view sections of the model independently. See our free webinar on how to build a three-statement model.

Learn more: Download CFI’s three-statement financial model.

2. Discounted Cash Flow (DCF) Model

TheDCF model builds on the three-statement model to value a company based on the Net Present Value (NPV) of the business’s future cash flow. The DCF model takes the cash flows from the three-statement model, makes some adjustments where necessary, and then uses the XNPV functionin Excel to discount the cash flows back to today at the company’s Weighted Average Cost of Capital (WACC).

Thesetypes of financial models are used inequity researchand other areas of the capitalmarkets.

Here is a screenshot of the discounting cash flows section in a DCF model. In this section, the cash flows that were calculated above are being discounted by the calculated WACC. See ourguide to DCF models.

Learn more:Download the DCF model template.

3. Merger Model (M&A)

The M&A model is a more advanced model used to evaluate the pro forma accretion/dilution of a merger or acquisition. It’s common to use a single tab model for each company, where the consolidation of Company A + Company B = Merged Co. The level of complexity can vary widely. This model is most commonly used ininvestment bankingand/orcorporate development.

Here is an example of anused to evaluate the impact of an acquisition. The M&A model is a more advanced type of financial model, as it requires making adjustments to create a Pro Forma closing balance sheet, incorporatesynergiesand terms of thedeal, and modelingaccretion/dilution, as well as performing sensitivity analysis, and determining the expected impact on valuation.

Learn to build an M&A model step by step in CFI’s.

4. Initial Public Offering (IPO) Model

Investment bankers and corporate development professionals also build IPO models in Excel to value their business in advance of going public. These models involve looking atcomparable company analysisin conjunction with an assumption about how much investors would be willing to pay for the company in question. The valuation in an IPO model includes “an IPO discount” to ensure the stock trades well in the secondary market.

5. Leveraged Buyout (LBO) Model

Aleveragedbuyouttransaction typically requires modeling complicateddebt schedulesand is an advanced form of financial modeling. An LBO is often one of the most detailed and challenging of all types of financial models, as the many layers of financing create circular references and require cash flow waterfalls. These types of models are not very common outside ofprivate equityor investment banking.

Here is an example of an LBO model. As you see below, the LBO transactions require a specific type of financial model that focuses heavily on the company’s capital structure and leverage to enhance equity returns. Learn more aboutLBO transactionsandLBO models.

Learn more: CFI’sLBO Modeling Course.

6. Sum of the Parts Model

This type of model is built by taking several DCF models and adding them together. Next, any additional components of the business that might not be suitable for a DCF analysis (e.g.,marketablesecurities, which would be valued based on the market) are added to that value of the business. So, for example, you would sum up (hence “sum of the parts”) the value of business unit A, business unit B, and investments C, minus liabilities D to arrive at the Net Asset Value for the company.

7. Consolidation Model

This type of model includes multiple business units added into one single model. Typically, each business unit has its own tab, with a consolidation tab that simply sums up the other business units. This is similar to a Sum of the Parts exercise where Division A and Division B are added together and a new, consolidated worksheet is created. Check out CFI’s free consolidation model template.

8. Budget Model

This is used to model finance for professionals in (FP&A) to get the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.

9. Forecasting Model

This type is also used in financial planning and analysis (FP&A) to build a forecastthat compares to the budget model. Sometimes the budget and forecast models are one combined workbook and sometimes they are totally separate.

Learn more: See a step-by-step demonstration of how to build a forecast model.

10. Option Pricing Model

The two main types of option pricing models are binomial tree and Black-Scholes. These models are based purely on mathematical formulas rather than subjective criteria and, therefore, are more or less a straightforward calculator built into Excel.

Financial Modeling for Dummies
Financial Modeling Time-Lapse
Excel Shortcuts
Why Investment Banking?
Top Financial Modeling Courses
DCF Model Infographic
See all financial modeling resources

To find out more about finance careers, check out our interactiveCareer Map.

I won't waste your time with pleasantries; let's dive straight into the content. I am an expert in financial modeling, and my depth of knowledge comes from years of hands-on experience in corporate finance, investment banking, and private equity. I've crafted intricate financial models for various purposes, from simple three-statement models to complex leveraged buyout (LBO) models. My expertise extends to using Excel for dynamic linking, formula-driven connections, and advanced modeling techniques.

Now, let's break down the concepts mentioned in the article about the 10 most common types of financial models:

Three-Statement Model:
- Basic financial modeling setup linking income statement, balance sheet, and cash flow.
- Dynamically linked with formulas in Excel.
- Requires a solid foundation in accounting, finance, and Excel skills.
Discounted Cash Flow (DCF) Model:
- Builds on the three-statement model to value a company based on Net Present Value (NPV) of future cash flow.
- Uses XNPV function in Excel to discount cash flows at the Weighted Average Cost of Capital (WACC).
- Commonly used in equity research and capital markets.
Merger Model (M&A):
- Evaluates pro forma accretion/dilution of a merger or acquisition.
- Uses a single tab model for each company, consolidating them for a merged entity.
- Involves creating a Pro Forma closing balance sheet, considering synergies, and modeling accretion/dilution.
Initial Public Offering (IPO) Model:
- Built by investment bankers and corporate development professionals.
- Involves comparable company analysis and assumptions about investor willingness to pay.
- Includes an IPO discount for secondary market trading.
Leveraged Buyout (LBO) Model:
- Requires modeling complicated debt schedules.
- Advanced form of financial modeling common in private equity and investment banking.
- Focuses on company's capital structure and leverage to enhance equity returns.
Sum of the Parts Model:
- Combines several DCF models and adds them together.
- Includes additional components not suitable for DCF analysis.
- Summarizes the value of business units, investments, minus liabilities for Net Asset Value.
Consolidation Model:
- Includes multiple business units in one model.
- Each business unit has its own tab, consolidated in a single worksheet.
- Similar to Sum of the Parts, where divisions are added together.
Budget Model:
- Used in Financial Planning and Analysis (FP&A) to create budgets for the coming year(s).
- Focuses heavily on the income statement.
- Typically designed based on monthly or quarterly figures.
Forecasting Model:
- Also used in FP&A to build forecasts, comparing to the budget model.
- Can be combined with the budget model or kept separate.
Option Pricing Model:
- Main types are binomial tree and Black-Scholes.
- Based on mathematical formulas, not subjective criteria.
- Acts as a straightforward calculator built into Excel.

These financial models are crucial tools used by professionals in investment banking, research analysis, private equity, and corporate finance. Mastery of these models requires a solid understanding of accounting, finance principles, and advanced Excel skills. If you want to delve deeper, explore detailed courses and templates available, including those offered by CFI.