Economics Essay Example | Topics and Well Written Essays - 750 words - 26

Economics - Essay Example In some cases, financial models may also quantify the financial impact of the policies of the firm, and of covenants or restrictions imposed by lenders or investors. A cash budget is a basic financial model. The engineering consulting firm generates a stream of $48,000 in monthly revenue for the first year from six customers, two per partner. A lot of time is spent on travels, about 30 trips per partner, in a year at a cost of $2,000 per trip. Every partner buys a new computer and updates software for $5000 per year. The firm looks forward to expanding to four customers per partner by the third year with assumed monthly revenue of $3000. The financial model is the gold standard for valuation. Cash budget and cash flow have been indicated as the best proxy for financial performance of corporate. The above financial model is easy to build just like cash flow. One column holds annual cash flow estimates, and rows hold individual itemized expenses. The models states yearly estimates depending on the firm’s revenue generation. In the case of existing growth rates, one can create bulk estimates that apply the same rate of growth for the five years. It is significant to note that sophisticated or detailed modeling does not substitute discretion or judgment. Reality checks will be conducted periodically concerning the core assumptions. The financial model illustrates what the firm must do in order to grow, the value of the growth, and what is expected of the firm. Financial models, even though take time to build, can pay for the consumed time and result into better investment