What are the dangers and disadvantages of using a financial model? Discuss.
The financial model is used for analyzing financial data and making financial decision. Forecasting is an important feature of financial modeling, it forecasts the future performance and premise of business by using existing data.
Answer and Explanation:
Dangers and disadvantages of a financial model are discussed below:
1. Complication: Financial models can be complicated and not easy to use. Only an expert in the financial model can use it easily. It requires in-depth knowledge of the business planning and strategies to get fair results as per planning.
2. Cost: A financial model is costly because it involves decisions related to heavy investment, and in case such investment fails to deliver desired returns, it may impact the performance of the business. It can also be considered costly because it involves a lot of time, and those firms in which time is more precious than money the financial model needs to more accurate.
3. Assumption: The financial model is based on various assumptions after analyzing the past performance and future capability of the business, and if such assumptions prove to be wrong, the financial results would be unfavorable for a firm. It is a reason that assumption can be a disadvantage in the financial model.
4. Error: In case any errors occur in the financial model, then the whole performance of the company suffers. It impacts the continuity of a company.
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from Corporate Finance: Help & ReviewChapter 8 / Lesson 7