18.2. Budgeting and Financial Modeling

Basically, a financial model is used to build a comprehensive budget (i.e., projected financial statements, such as the income statement, balance sheet, and cash flow statement). Such a model can be called a budgeting model, since we are essentially developing a master budget with it. Applications and uses of the model, however, go beyond developing a budget. They include:

  • Financial forecasting and analysis

  • Capital expenditure analysis

  • Tax planning

  • Exchange rate analysis

  • Analysis for mergers and acquisitions

  • Labor contract negotiations

  • Capacity planning

  • Cost-volume-profit analysis

  • New venture analysis

  • Lease/purchase evaluation

  • Appraisal of performance by segments

  • Market analysis

  • New product analysis

  • Development of long-term strategy

  • Planning financial requirements

  • Risk analysis

  • Cash flow analysis

  • Cost and price projections

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