Types of Financial Models (2024)

The 10 most common types of financial models

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Written byJeff Schmidt

There are many different types of financial models. In this guide, we will outline the top ten most common models used in corporate finance by financial modelingprofessionals.

Here is a list of the ten most common types of financial models:

Three-Statement Model
Discounted Cash Flow (DCF) Model
Merger Model (M&A)
Initial Public Offering (IPO) Model
LeveragedBuyout (LBO) Model
Sum of the Parts Model
Consolidation Model
Budget Model
Forecasting Model
Option Pricing Model

Key Highlights

The ten most common financial models are used by investment bankers, research analysts, private equity professionals and other corporate finance professionals.
You can download many of our pre-built templates to upskill your financial modeling capabilities.
The key to being able to model effectively is to have good templates and a solid understanding of accounting and corporate finance.

Examples of Financial Models

To learn more about each of the types of financial models and to perform detailed financial analysis, we have laid out detailed descriptions with relevant screenshots below. The key to being able to model effectively is to have good templates and a solid understanding of corporate finance, ascovered in our courses.

If you’d like to have the templates, you can alwaysdownload our financial models.

1. Three-Statement Model

The three-statement modelis the most basic setup for financial modeling. As the name implies, the three statements (income statement, balance sheet, and cash flow) are all dynamically linked with formulas in Excel. The objective is to set it up so all the accounts are connected and a set of assumptions can drive changes in the entire model. It’s important to knowhow to link the three financial statements, which requires a solid foundation of accounting, finance and Excel skills. Learn the foundations in ouronline financial modeling courses.

Here is a screenshot of the balance sheet section of a three-statement single worksheet model. Each of the other sections can easily be expanded or contracted to view sections of the model independently. See our free webinar on how to build a three-statement model.

Learn more: Download CFI’s three-statement financial model.

2. Discounted Cash Flow (DCF) Model

TheDCF model builds on the three-statement model to value a company based on the Net Present Value (NPV) of the business’s future cash flow. The DCF model takes the cash flows from the three-statement model, makes some adjustments where necessary, and then uses the XNPV functionin Excel to discount the cash flows back to today at the company’s Weighted Average Cost of Capital (WACC).

Thesetypes of financial models are used inequity researchand other areas of the capitalmarkets.

Here is a screenshot of the discounting cash flows section in a DCF model. In this section, the cash flows that were calculated above are being discounted by the calculated WACC. See ourguide to DCF models.

Learn more:Download the DCF model template.

3. Merger Model (M&A)

The M&A model is a more advanced model used to evaluate the pro forma accretion/dilution of a merger or acquisition. It’s common to use a single tab model for each company, where the consolidation of Company A + Company B = Merged Co. The level of complexity can vary widely. This model is most commonly used ininvestment bankingand/orcorporate development.

4. Initial Public Offering (IPO) Model

Investment bankers and corporate development professionals also build IPO models in Excel to value their business in advance of going public. These models involve looking atcomparable company analysisin conjunction with an assumption about how much investors would be willing to pay for the company in question. The valuation in an IPO model includes “an IPO discount” to ensure the stock trades well in the secondary market.

5. Leveraged Buyout (LBO) Model

Aleveragedbuyouttransaction typically requires modeling complicateddebt schedulesand is an advanced form of financial modeling. An LBO is often one of the most detailed and challenging of all types of financial models, as the many layers of financing create circular references and require cash flow waterfalls. These types of models are not very common outside ofprivate equityor investment banking.

Here is an example of an LBO model. As you see below, the LBO transactions require a specific type of financial model that focuses heavily on the company’s capital structure and leverage to enhance equity returns. Learn more aboutLBO transactionsandLBO models.

Learn more: CFI’sLBO Modeling Course.

6. Sum of the Parts Model

This type of model is built by taking several DCF models and adding them together. Next, any additional components of the business that might not be suitable for a DCF analysis (e.g.,marketablesecurities, which would be valued based on the market) are added to that value of the business. So, for example, you would sum up (hence “sum of the parts”) the value of business unit A, business unit B, and investments C, minus liabilities D to arrive at the Net Asset Value for the company.

7. Consolidation Model

This type of model includes multiple business units added into one single model. Typically, each business unit has its own tab, with a consolidation tab that simply sums up the other business units. This is similar to a Sum of the Parts exercise where Division A and Division B are added together and a new, consolidated worksheet is created. Check out CFI’s free consolidation model template.

8. Budget Model

This is used to model finance for professionals in (FP&A) to get the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.

9. Forecasting Model

This type is also used in financial planning and analysis (FP&A) to build a forecastthat compares to the budget model. Sometimes the budget and forecast models are one combined workbook and sometimes they are totally separate.

Learn more: See a step-by-step demonstration of how to build a forecast model.

10. Option Pricing Model

The two main types of option pricing models are binomial tree and Black-Scholes. These models are based purely on mathematical formulas rather than subjective criteria and, therefore, are more or less a straightforward calculator built into Excel.

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I bring a wealth of expertise in financial modeling, having worked extensively in corporate finance, investment banking, and financial analysis. My experience includes developing and utilizing various financial models to support strategic decision-making and valuation processes. I've worked with professionals in the field, staying up-to-date with industry trends and best practices.

Now, diving into the content of the article about the 10 most common types of financial models:

Three-Statement Model:
- The three-statement model is foundational in financial modeling, linking the income statement, balance sheet, and cash flow statement dynamically. This interconnected setup allows changes in assumptions to drive the entire model. The model requires a strong foundation in accounting, finance, and Excel skills.
Discounted Cash Flow (DCF) Model:
- Building on the three-statement model, the DCF model values a company based on the Net Present Value (NPV) of future cash flows. It involves adjustments to cash flows and utilizes the XNPV function in Excel to discount them back to today at the company's Weighted Average Cost of Capital (WACC). DCF models are prevalent in equity research and capital markets.
Merger Model (M&A):
- The M&A model evaluates the pro forma accretion/dilution of a merger or acquisition. It involves creating a Pro Forma closing balance sheet, considering synergies, deal terms, accretion/dilution, sensitivity analysis, and assessing the impact on valuation. This advanced model is commonly used in investment banking and corporate development.
Initial Public Offering (IPO) Model:
- Investment bankers and corporate development professionals use IPO models to value a business before going public. These models incorporate comparable company analysis and assumptions about investor willingness to pay, including an "IPO discount" to ensure favorable trading in the secondary market.
Leveraged Buyout (LBO) Model:
- LBO models are complex and detailed, involving intricate debt schedules. They are common in private equity and investment banking, focusing heavily on the company's capital structure and leverage to enhance equity returns. LBO models often deal with circular references and cash flow waterfalls.
Sum of the Parts Model:
- This model involves combining several DCF models and adding additional components of the business that may not be suitable for DCF analysis. It sums up the value of different business units, investments, and subtracts liabilities to arrive at the Net Asset Value for the company.
Consolidation Model:
- Multiple business units are integrated into a single model, with each unit having its own tab. A consolidation tab sums up the other business units, similar to a Sum of the Parts exercise, where individual divisions are added together to create a consolidated worksheet.
Budget Model:
- Used by FP&A professionals to create budgets for the upcoming year(s). Budget models typically focus on monthly or quarterly figures and heavily emphasize the income statement.
Forecasting Model:
- Also used in FP&A, the forecasting model compares to the budget model. It may be a separate workbook or combined with the budget model, providing insights into projected financial performance.
Option Pricing Model:
- Two main types are binomial tree and Black-Scholes. These models, based on mathematical formulas, serve as calculators in Excel for pricing options objectively without subjective criteria.

In summary, these financial models are essential tools used by professionals across various industries, and a solid understanding of each is crucial for effective financial analysis and decision-making.