RISHABH SACHAN

10 Important
Types of
Financial
Models
“The most common types of financial models used in corporate
finance by financial modeling professionals.”

Source - CFI
 Top 10 Types of Financial
Models
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 modeling
professionals.

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

models:
1. Three-Statement Model
2. Discounted Cash Flow (DCF) Model
3. Merger Model (M&A)
4. Initial Public Offering (IPO) Model
5. Leveraged Buyout (LBO) Model
6. Sum of the Parts Model
7. Consolidation Model
8. Budget Model
9. Forecasting Model
10. Option Pricing Model
1. Three-Statement Model
The three-statement model is the most basic setup for financial
modeling. The three-statement model in financial modeling links the
income statement, balance sheet, and cash flow dynamically using
Excel formulas.

It relies on solid accounting, finance, and Excel skills to connect

accounts and allow assumptions to drive changes throughout the
entire model. See a snapshot of the balance sheet section in the
attached screenshot.
2. Discounted Cash Flow (DCF) Model
The DCF model, an extension of the three-statement model, assesses
a company's value based on the Net Present Value (NPV) of future
cash flows.

It adjusts cash flows from the three-statement model and applies

the XNPV function in Excel to discount them back to present value
using the company's Weighted Average Cost of Capital (WACC).
Widely used in equity research and capital markets,

a snapshot of the cash flow discounting section in a DCF model is

provided, demonstrating the application of WACC to discount
previously calculated cash flows.
3. Merger Model (M&A)
The M&A model, employed in investment banking and corporate
development, assesses the pro forma accretion/dilution of a merger
or acquisition.

Typically, a single-tab model is used for each company involved

(Company A and Company B), consolidating them to form Merged Co.

This advanced financial model involves adjustments for a Pro Forma

closing balance sheet, integration of synergies and deal terms,
accretion/dilution modeling, sensitivity analysis, and evaluating the
expected impact on valuation.
4. Leveraged Buyout (LBO) Model
An advanced form of financial modeling, a leveraged buyout (LBO)
involves intricate debt schedules and is particularly detailed and
challenging.

LBO models, primarily used in private equity and investment banking,

require a specific focus on a company's capital structure and
leverage to optimize equity returns.

Circular references and cash flow waterfalls add complexity to these

models, making them less common outside the specified fields. See
the attached example of an LBO model highlighting the emphasis on
capital structure and leverage.
5. Initial Public Offering (IPO) Model
Investment bankers and corporate development professionals use
Excel to construct IPO models, assessing the value of a business
before going public.

These models combine comparable company analysis with

assumptions about investor willingness to pay. The valuation
incorporates an "IPO discount" to ensure favorable trading in the
secondary market.

6. Sum of the Parts Model

The sum-of-the-parts model is created by combining multiple DCF
models and incorporating non-DCF-friendly components like
marketable securities.
This involves adding the values of different business units and
investments, deducting liabilities, to determine 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.
8. Budget Model
This is used to model finance for professionals in financial planning
& analysis (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 forecast that compares to the budget model. Sometimes the
budget and forecast models are one combined workbook and
sometimes they are totally separate.

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.