Financial modeling is the process of building mathematical and financial representations of a company's operations, projects, or strategies to analyze and forecast potential outcomes. Often utilizing tools such as spreadsheets, financial models are used to simulate scenarios, evaluate investment opportunities, and guide decisions on financing, projects, or acquisitions.

For example, a company considering expanding its operational capacity might create a financial model to project the costs and anticipated returns over time. Similarly, an investor could use a financial model to assess the viability of investing in a new venture by analyzing projected financial statements and metrics such as Net Present Value (NPV).

Financial modeling integrates data from past performance (historical financial statements) and assumptions about future conditions, enabling stakeholders to identify risks and opportunities within their strategies. This method not only aids internal finance teams in their analyses but also supports external parties such as investors, auditors, or stakeholders requiring transparency into a company's potential outcomes.