Important 60 Financial Modeling Terms You Need to Know

Financial modeling is the process of developing a spreadsheet summary of a company’s costs and earnings that can be used to quantify the impact of a future event or decision. A financial model may be useful to corporate leaders in a variety of ways. Financial analysts use it most frequently to assess and predict how upcoming developments or executive decisions will impact a company’s stock performance. Financial modeling is an important skill, and the ability to construct accurate and solid financial models is required to succeed as a finance professional. We’ve compiled a glossary of key financial modeling terms.

Financial Modeling Terms

A financial model is a tool used by companies and investors to forecast the performance of a certain financial venture. A financial model is used to estimate the cash flows related to an investment and to determine the investment’s present and future values.

There are many different financial models, but the majority of them combine ratios, financial statement analysis, and cash flow analysis. Calculated by a cash flow analysis are the inflows and outflows of funds related to a specific investment. The financial performance of a corporation over time is examined by financial statement analysis. Ratios are used to evaluate the financial health of an organization.

A financial model can be used to determine whether or not to invest in a specific firm, how much to invest, and when to sell a financial investment, among other factors. Businesses and investors utilize financial modeling as a crucial tool to help them make wise financial decisions.

Financial Modeling Terms: Glossary

Some of the most important Financial Modeling Terms are mentioned-

1. Accounts Close

All financial transactions that took place in the business during a specific time are recorded, compiled, and reported during the accounting close. A crucial step in the accounting cycle is the accounting closure, which is typically carried out after each accounting period like monthly, quarterly, or yearly.

2. Accounts Payable

A business’s responsibility to pay a third party for goods and/or services they acquired on credit is known as an account payable. Liabilities are listed for accounts payable on a business’s balance sheet. It is one of the most common Financial Modeling Terms.

3. Accounts Receivables

A company’s future revenue stream is represented by the asset known as accounts receivable. Customers’ outstanding balances for previously delivered goods and services are known as accounts receivable. The value of accounts receivable less any adjustments for dubious accounts is the net accounts receivable.

4. Accounts Receivable Turnover

The average number of times a company’s accounts receivables are collected throughout a specific time is known as accounts receivable turnover.

5. Accounting on an accrual basis

Regardless of when the money is collected or paid out, transactions using the accrual basis of accounting are recorded as soon as they are incurred. Regardless of whether a transaction generated any cash flow, it is nonetheless recorded.

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6. Balance Sheet

An organization’s assets, liabilities, and owner’s equity are listed on a balance sheet, which is a financial statement that is often prepared at the end of an accounting period. It is one of the most important Financial Modeling Terms.

7. Before Tax Profit Margin

The before-tax profit margin calculates a company’s profit before taxes, depreciation, amortization, and other non-cash expenses are taken into account. By dividing the company’s operating income by its annual revenue, the before-tax profit margin is determined.

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8. Benchmarking

Comparing a company to its rivals or its prior performance to gauge how it compares and how effective it is is known as benchmarking. Benchmarking is used to assess a company’s performance and its strategies to pinpoint areas that could be improved.

9. Break-Even Evaluation

A financial management technique called a break-even analysis aids organizations in identifying the sales volume at which total income will be equal to total costs.

Metadata for SEO When revenue and expenses are equal, a business reaches its break-even point. A break-even analysis is a financial management technique that aids firms in identifying the sales volume at which total revenue and total costs will be equal.

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10. Business Intelligence

Business intelligence, sometimes known as BI, is a collection of tools and methods for obtaining, evaluating, and disseminating data so that informed decisions can be made. Businesses utilize BI to help them make wiser decisions.

11. Capital Budgeting

The process of calculating the financial impact of a planned project is known as capital budgeting in the world of finance. A proposed project’s estimated financial returns and associated risks are evaluated as part of the capital budgeting process to help decide whether to move forward with the project or not. It is one of the widely used Financial Modeling Terms.

12. Capital Expenditures

Capital expenditures are expenses required for a business’s long-term growth or expansion. Investments in capital are assets that are normally depreciated.

13. Capital Restriction

A corporation’s limited resources can only be used for profitable endeavors, hence capital rationing refers to the restriction of capital expenditure on projects that can provide better returns. It is possible to choose which projects to take on via capital rationing.

14. Capitalization Ratio

A financial statistic used to assess a company’s degree of financial leverage is the capitalization ratio. It is the debt-to-equity ratio. Metadata for SEO The ability of businesses to raise their profits or revenues while just slightly raising costs is referred to as operating leverage. It is accomplished by reinvesting a portion of the company’s earnings, and boosting assets while limiting liabilities.

15. Cash Budget

A cash budget is a projection of cash flow for a specific time frame. It aids a company in estimating how much cash it will have available at any particular time. Businesses need the cash budget because it gives them the ability to predict when and how much cash they will have on hand. It is one of the most common Financial Modeling Terms that is used by many financial analysts.

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16. Debt to Equity Ratio

A financial ratio called the debt-equity ratio calculates how much of a company’s assets are financed by debt or creditors.

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17. Debt Rate

Financial managers use the debt ratio to calculate how much debt a company can afford to take on. A company’s ability to exist may suffer if it has a high debt ratio.

18. Discounted Cash Flow (DCF)

A technique used in finance to determine the present value of a stream of future cash flows is called discounted cash flow (DCF). A firm, project, or asset’s acquisition value can be calculated using DCF. It is also used to calculate the required rate of return on investment opportunities, among other business decisions. It is one of the most commonly used Financial Modeling Terms.

19. Financial close

A company’s financial statements must be reviewed, finished, and approved to be accurate and reflect the company’s financial status.

20. Financial Plan

A financial plan is a comprehensive outline of the future earnings, cash flows, and financial condition of a person, company, or project. A balance sheet and a cash flow statement are typically included.

21. Financial Reporting

The process of gathering and presenting financial data about a corporation is known as financial reporting. This entails gathering data on the business’s earnings, costs, assets, liabilities, and equity before compiling it into a report that responds to the following questions: How much money did the business make? And how is it doing financially?

22. Gross Profit

Gross profit is the money that a business keeps after deducting all of the costs associated with creating and providing its products or services. Calculate the gross profit by deducting the cost of goods sold from your total sales.

23. Gross Profit margin

A company’s gross profit margin, often known as its gross margin, is calculated as a percentage of its total sales. By dividing the gross profit by the total sales, the gross profit margin is computed.

24. Gross Sales

Gross sales are the complete sum of money a business makes from the sale of its products and services before any costs or fees are subtracted.

25. Human Capital Management

The phrase “human capital management” (HCM) refers to a company’s people-focused initiatives and tactics intended to unleash the full potential of its workforce.

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26. Hedging

To reduce the risk of adverse price changes in another asset, hedging includes establishing a stake in one tradable asset. The term hedge means to guard against risk.

27. Intangible Assets

A non-physical item with value is called an intangible asset. Many organizations’ balance sheets contain a sizable amount of intangible assets. Such things as goodwill, patents, trademarks, and customer lists are among them.

28. Interest Coverage Ratio

A ratio that contrasts an organization’s operating profit and interest expenses is called the interest coverage ratio. The ratio should be greater because it indicates that the company’s earnings are sufficient to cover interest costs.

29. Internal Rate of Return

The discount rate that reduces the net present value of all projected cash flows to zero is known as the internal rate of return (IRR). In other words, the interest rate determines whether the initial investment’s current value is equivalent to the present value of its cash flows. It is one of the very important Financial Modeling Terms.

30. Leading Indicator

A leading indicator is a statistical tool that enables you to recognize patterns in economic expansion, recognize business cycles, and estimate future monetary conditions.

31. Long-Term Liabilities

Liabilities with a longer time horizon than one year are debt or other financial commitments. These debts are typically connected to long-term assets, such as real estate and machinery.

32. Long-Term Assets

Long-term assets are those that a corporation will still have one year from now or more. Examples include property, structures, and equipment.

33. Modeling

The process of creating a model that depicts the financial aspects of a company’s operations, projects, investments, and other financial decisions is known as financial modeling.

34. Market Capitalization

The total dollar market value of a company’s outstanding shares is known as market capitalization (market cap). The market capitalization of a corporation is determined by multiplying the total number of outstanding shares by the share’s current market value.

35. Marginal Analysis

Businesses can use marginal analysis to assess the impact of little changes in one component on the subsequent change in another. Marginal cost analysis, marginal revenue analysis, and marginal income analysis are the three different types of marginal analysis.

36. Net Income

The difference between total revenue and entire costs is known as net income. It is calculated by deducting total outlays from the total cost. The difference between revenue and expenses is known as the net income or profit.  It is also one of the very important Financial Modeling Terms.

37. Net Income Before Taxes

The difference between your total revenue and your total costs (before taxes) is your net income. On your income statement, it is normally shown as one line item.

38. Net Present Value

The amount a company would be worth in the future if it utilized its cash flows to expand at a steady rate is known as the net present value (NPV) of an investment.

39. Required Rate of Return

The required rate of return (RRR) is the minimal rate of return that a firm or investor is willing to give on a project or investment. If a corporation or investor has a greater RRR, they are more likely to have a higher risk tolerance and accept a higher level of risk.

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40. Research & Development

Designing and creating new goods and services is referred to as research and development, or R&D. R&D is one of the crucial components of an organization’s innovation.

41. Retained Profits

The net income that a business keeps and does not give to shareholders is known as retained earnings. Retained earnings are listed as an asset on a company’s balance sheet.

42. Scenario Planning

Scenario planning is a technique for strategic planning that entails imagining potential futures, considering their ramifications, and building backup plans for each potential future. Numerous organizations of all stripes, including governmental bodies, nonprofits, and commercial enterprises, employ this technique.  It is one of the very essential Financial Modeling Terms.

43. Sensitivity Analysis

A sensitivity analysis is a type of financial analysis used to assess how various assumptions and potential outcomes can affect a company’s earnings. It enables a business to decide which elements are more crucial and to comprehend potential outcomes.  It is also one of the very essential Financial Modeling Terms.

44. Statement of Shareholder’s Equity

A financial statement that displays changes in a company’s equity over a specified time is the statement of shareholders’ equity (also known as the shareholders’ equity report). This statement breaks down the balance sheet items into their sources and shows them in detail.

46. Trial Balance

The accounts in your general ledger are listed in a trial balance together with their balances and the accounts to which they are tied. A trial balance can be used to check the general ledger’s balance and provides a list of all the balances.

47. Tax

Tax is a required payment that is often made to a governing body to finance public spending. Direct taxes and indirect taxes are both types of taxes.

48. Taxable Income

Net taxable income is the amount of money that is still left over after all business-related costs have been taken into consideration. The amount of money that firms disclose to the Internal Revenue Service (IRS) on a business income tax return is known as taxable income.  It is also one of the major Financial Modeling Terms.

49. Unassigned Costs

Unallocated costs are expenses that assist a business in keeping track of operating expenditures but do not fit the requirements of a particular cost pool. Unallocated costs are simple to track charges that are unrelated to any particular activity.

50. Unlevered Free Cash Flow

Unlevered free cash flow is a financial indicator used to determine how much cash a company generates before deducting taxes and interest. In other words, it’s a gauge of the amount of money a business’s core operations produce in its business activities that do not include other companies’ investments and debt repayments.

51. Value Motivators

Value drivers are the expenses incurred by a specific company that has the greatest influence on its value. One of the most crucial elements in determining the price to pay for a firm is its value drivers.

52. Variable expenses

Costs that vary according to the volume of output are known as variable costs. Expenses that are closely correlated with a company’s level of production are called variable costs.

53. Variance Reporting

Business management can benefit greatly from variance analysis. It is, in essence, the process of locating and calculating revenue and cost variances.

54. What-If Study

An essential component of financial modeling is what-if analysis. You can experiment with financial factors using what-if analysis so that you can make decisions that are wise for your business.

55. Working Capital

Working capital is a crucial indicator of a business’s financial stability. The discrepancy between current assets and current liabilities is measured. Working capital is a gauge of how much cash the business has available to support its expansion.

56. Weighted Average Cost of Capital

The cost of a company’s capital structure, which consists of stock and debt, is calculated using the weighted average cost of capital (WACC), which is also used to determine the cost of equity. WACC is a crucial profitability indicator that is frequently used to make capital budgeting decisions.

57. Zero-Based Budgeting

A technique for organizing and managing a company’s spending is zero-based budgeting. It starts by decomposing a company’s projects into tasks before figuring out how many resources are needed for each activity.

These financial modeling terms are very used extensively in every aspect of the business world.

Financial Modeling Terms: Three Financial Statements

The income statement, balance sheet, and cash flow statement are the three essential financial statements that are very popular among many business organizations. This manual will show how the relationships between these three fundamental claims come together.

58. Income Statement

An investor or analyst will typically look at the income statement first. The income statement, which summarises the company’s performance for each period, begins with sales revenue. The gross profit is then calculated by deducting the cost of goods sold (COGS) from the statement.

Depending on the nature of the business, other operating costs and income then have an impact on gross profit to arrive at net income, or “the bottom line,” for the company.

59. Balance Sheet

The company’s present assets, liabilities, and shareholders’ equity are listed on the balance sheet. The two sides of the balance sheet must be equal in terms of assets, liabilities, and equity. The first item in the asset section is cash and equivalents, which should equal the balance found at the conclusion of the cash flow statement.

The balance sheet is then updated from period to period with the ending balance in each major account. The transfer of net income from the income statement to the balance sheet after adjusting for dividend payments is represented by changes in retained profits.

60. Cash Flow Statement

The net income is then modified for any non-cash expenses on the cash flow statement. The adjustments to the balance sheet are then used to compute cash inflows and outflows. The beginning and ending cash balances as well as the change in cash per period are shown on the cash flow statement.

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Frequently Asked Questions (FAQ)

1. What is a Financial Model?

A financial model is an abstract, future-looking depiction of actual financial circumstances for use in decision-making. Financial models can be created for a variety of purposes, including businesses, projects, and asset portfolios. In spreadsheet programs like Excel, a financial model is created.

2. Why should your financial model be reviewed before being used?

Ruth McKeever estimates that over 95% of spreadsheets have real or potential inaccuracies. This alone warrants a reconsideration of your model, right?

3. How are the financial models used?

Financial models are used in many industries to estimate a firm’s financial performance and direct historical examination of the company.


Financial Modeling Terms help us to explain the sophisticated financial world. Financial models that are under regulatory inspection may need to include a data dictionary. Include a vocabulary of model terminology as well. The data manager could lead this initiative. When the output of a financial model is compared to other numbers, both the numerical definition and the non-numerical definition should be the same. A definition’s non-narrative representation can be very helpful. When feasible, demonstrate flows and builds.

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