What is the primary purpose of a financial model?

The primary purpose of a financial model is to represent a company's financial performance for better decision-making. Financial models are structured, quantitative representations of an entity's financial performance, typically built using spreadsheet software. They incorporate historical data and assumptions about future performance, helping stakeholders understand potential financial outcomes, evaluate investment opportunities, and make informed business decisions.

By simulating various scenarios, users can assess how changes in parameters such as revenue growth rates, cost structures, and financing options could impact the overall financial health of a company. This assists management in strategic planning, forecasting, budgeting, and evaluating risks.

Other options reflect less comprehensive uses: simply guessing future sales figures without data does not utilize structured analysis, creating advertising budgets is a specific function that may not encompass a full picture of financial performance, and analyzing personal spending habits is narrower in scope, focusing on individual finance rather than corporate decision-making.