Section 1 of 6 · 0–3 min
What is a financial model?
A financial model is a structured tool that converts assumptions into outputs to support a business decision.
A spreadsheet becomes a financial model when it is designed to answer a question, test assumptions, and produce decision-useful outputs.
The café owner is considering opening on Sundays.
“What is profit?”
“If we open on Sundays, will the extra revenue cover the extra wages, food costs, and operating costs?”
| Element | Café example |
|---|---|
| Business question | Should the café open on Sundays? |
| Decision-maker | Café owner |
| Model purpose | Forecast the financial impact of Sunday trading |
| Main output | Incremental monthly profit and cash flow |
| Key risk | Extra sales may not cover extra labour and food costs |
Business question
Café example
Should the café open on Sundays?
Decision-maker
Café example
Café owner
Model purpose
Café example
Forecast the financial impact of Sunday trading
Main output
Café example
Incremental monthly profit and cash flow
Key risk
Café example
Extra sales may not cover extra labour and food costs
What makes a spreadsheet a financial model?
A model starts with a decision, not with a formula.