Creating a Revenue Model
February 12, 2025
Corporate finance is one of the most important subjects in the financial domain. It is deep rooted in our daily lives. All of us work in big or small corporations. These corporations raise capital and then deploy this capital for productive purposes. The financial calculations that go behind raising and successfully deploying capital is what […]
There is much more to the international financial system than what meets the eye. For instance, if you were to ask an average person about the parties involved in making a payment, very few will come up with the term clearinghouse. This is because they think about payers, payees, and even intermediaries. However, the concept […]
The economics of sports leagues is quite complicated. This is because of various factors. However, two of the most important factors are: The revenue is generated at the central level i.e., by the franchisor, and at the franchise level as well i.e. local revenue. For instance, broadcasting rights are monetized at the central level. However, […]
Infrastructure finance is an extremely complicated and advanced field. There are many complex financial instruments related to infrastructure finance which have been created and are regularly traded between interested parties. One such financial instrument is the collateralized debt obligation (CDOs). The issuance of CDOs is the most basic way in which the principles of structured […]
The concept of strategic finance relates to making decisions that help the firm increase its cash flow in the long run. Strategic finance is about changing the focus from short-term profits to long-term value creation. On the other hand, sustainability is about including more stakeholders in the value creation process. For instance, in the past, […]
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.
Your email address will not be published. Required fields are marked *