What Are the Different Types of Financial Analysis Models?
The two primary types of financial analysis models are quantitative models and accounting models. When professionals use quantitative models in order to analyze their financial health, they are concerned with factors such as market behaviors, returns on investments, and pricing of assets. Accounting models, on the other hand, tend to focus on issues of cash flow and costs of equipment and labor. Financial analysts often use both kinds financial analysis models to plan for projects and future growth.
Quantitative financial analysis models tend to be the more complex of the two primary types. Analysts who engage in this kind of work often have strong mathematical backgrounds. Engineers, physicists, and computer scientists may perform this kind of modeling using complicated algorithms. Quantitative financial modelers often use software designed to create mathematical formulas that describe and predict behaviors of a number of variables.
Financial managers may use quantitative analysis to create strategies for long term growth. For example, if a manager is concerned with developing an investment portfolio that can generate the highest returns, thereby improving the value of an organization, he or she can use a quantitative model to determine which investment strategies can be most effective. While proponents of this type of model believe that it can help financial planners develop unique strategies and fresh perspective, critics believe that predictions often can be misinterpreted due to the complexity of most models.
Most accounting financial models are based on financial statements. Managers use these models to determine how much cash they have available to them and how it best can be distributed. Whereas quantitative financial analysis models often focus on fixed assets that cannot be turned immediately into cash, accounting models focus on cash flow that can be spent on capital.
Accounting financial analysis models are commonly used for decision-making purposes. If a manager is prepared to start a new project, he or she can discuss potential scenarios with colleagues and create a list of questions and risks. A manager can pass this information down to a managerial accountant, who is responsible for gathering and organizing financial statements. An accountant then provides calculations for each scenario.
While most businesses use accounting financial analysis models to make basic operational decisions, many specialists believe that this kind of analysis sometimes is unable to provide a realistic financial model for an organization. Factors such as value of fixed assets can impact an organization's value and in turn affect its ability to receive lines of credit. In most accounting models, however, many fixed assets, such as stocks, are not taken into account.
Discuss this Article
Post your comments