Top 10 Types of Financial Models for Valuation & Planning

Financial modelling is an indispensable skill for finance professionals, enabling businesses to make informed decisions about investments, valuations, and strategic planning. Each type of financial model serves a unique purpose, ranging from basic forecasting to complex risk analysis. Below are the most common financial models, their uses, and how they help businesses thrive in a competitive environment.

1. THREE-STATEMENT MODEL

The three-statement model is the foundation of most financial modelling, which integrates the income statement, balance sheet, and cash flow statement into a single, dynamically linked model. It is used in financial forecasting, budgeting, and performance analysis.
Key Features:

Links all three financial statements dynamically.
Helps assess future performance and liquidity.
Often serves as the foundation for more complex models.

2. DISCOUNTED CASH FLOW (DCF) MODEL

The DCF model is widely used for business and investment valuation. It estimates a company’s intrinsic value by projecting free cash flows and discounting them to their present value. It is used in valuation, investment analysis, and mergers & acquisitions (M&A).
Key Features:

Project's free cash flows (FCF) over time.
Applies a discount rate (e.g., WACC) to calculate present value.
Helps determine if a stock or business is undervalued.

3. BUDGET MODEL

Budget models help organizations plan and control their financial resources. These models project revenues, expenses, and cash flows for short-term planning. It is used in corporate finance and financial planning.
Key Features:

Covers 1–3 years of financial data.
Tracks performance against actuals.
Guides internal decision-making.

4. FORECASTING MODEL

The Forecasting Model predicts future financial performance using historical data and trends. It is used in strategic planning, scenario analysis, and risk assessment.
Key Features:

Includes revenue- or expense-driven approaches.
Incorporates scenario analysis (best/worst case).
Prepares businesses for growth or downturns.

5. VALUATION MODELS

The valuation models determines the worth of a business or asset through various methods like Comparable Company Analysis (Comps), Precedent Transactions, and DCF. It is used in Investment banking, IPO preparation, and M&A.
Key Features:

Uses multiples (P/E, EV/EBITDA, etc.).
Benchmarks performance against industry peers.
Offers a quick approach to relative valuation.

6. LEVERAGED BUYOUT (LBO) MODEL

LBO models are advanced tools used primarily in private equity. It analyzes the feasibility of acquiring a company using debt and evaluates potential returns. It is used in private equity and acquisition analysis.
Key Features:

Focuses on debt repayment and investor returns (IRR).
Tests different leverage levels and exit scenarios.
Evaluates cash flow stability under varying conditions.

7. MERGERS & ACQUISITIONS (M&A) MODEL

It evaluates the financial impact of mergers, acquisitions or divestitures. It is used in investment banking and corporate finance. They help determine target valuations, estimate synergies, and analyze deal structures
Key Features:

Combines financials of two companies (acquirer + target).
Analyzes synergies, accretion/dilution, and financing.
Determines deal feasibility and pricing.

8. SUM-OF-THE-PARTS (SOTP) MODEL

It values each division of a conglomerate individually, then aggregates them to estimate total value. It is used in corporate restructuring and investment analysis.
Key Features:

Values segments separately (DCF, Comps, etc.).
Useful for spin-off and divestiture planning.
Identifies undervalued or non-core assets.

9. OPTION PRICING MODEL

It calculates the fair value of financial options. It is used in derivatives trading and risk management.
Key Features:

Employs models like Black-Scholes and Binomial.
Considers volatility, time, and strike price.
Aids in accurate pricing and strategic decision-making.

10. CREDIT RISK MODEL

It assesses the likelihood of borrower default. It is used in banking, credit analysis, and risk management.
Key Features:

Uses credit scores, financial ratios, and probability models.
Includes stress testing for adverse scenarios.
Helps lenders make informed loan decisions.

COMPARISON OF KEY MODELS

MODEL TYPE	PRIMARY USE	FREQUENCY OF USE	WHY?
Three-Statement Model	Integrated financial analysis	Most used	Foundational, versatile, and required for nearly all financial tasks.
DCF Model	Intrinsic valuation	High	Critical for investment decisions and M&A, but relies on three-statement outputs.
Budget/Forecast Models	Planning and resource allocation	High	Widely used in FP&A, but often built atop three-statement frameworks.
Valuation Models	Business/asset valuation	Moderate-High	Includes DCF, comps, and precedent transactions—dependent on base data.
M&A/LBO Models	Deal analysis	Moderate	Specialized for investment banking and PE, less common in daily operations.
SOTP Model	Conglomerate valuation	Low-Moderate	Niche use for diversified firms.
Option Pricing Model	Derivatives valuation	Low-Moderate	Specialized for trading, risk management, and corporate hedging.
Credit Risk Model	Default probability	Moderate	Essential for banks and lenders, but sector-specific.