Financial Modeling

The process of using existing data to predict how a company or investment is going to behave financially in the future.

In the business news world, we often hear about things like “predicted earnings” and “predicted growth.” We might come across statements like these: “The Wax Candlestick Co. fell short of its predicted sales goals for the quarter, and now its stock is in the toilet.” So...where do these predictions come from? Are they using some kind of crystal ball? Tarot cards? Tea leaves? A Ouija board? Professor Trelawney in the tower?

No, what they’re using is something called financial modeling. A company takes all of its data, all of its numbers, that deal with whatever category of business they’re trying to predict (earnings, growth, sales, revenue, whatevs). Then they look at how those numbers have changed over time, taking care to account for outside influences like new laws, economic changes, interest rate hikes, and the like. Then experts apply their, you know, expertise...to all of that data, and try to predict how those numbers might change over the next month, quarter, year, or beyond. Companies and their investors then use those predictions—those financial models—to guide their business and investment decisions.