The difference between financial forecasting and financial modeling is that the former is the process in which a company thinks about and prepares for the future, while the latter is the act of calculating, forecasting or estimating a company’s financial numbers.
Financial Forecasting
When a company conducts its financial forecasts, it seeks to provide the means for the expression of its goals and priorities to ensure they are internally consistent. It can also help a company identify the assets or debt needed to achieve its goals and priorities.
A good example of a financial forecast is the forecasting of a company’s sales. Since most financial statement accounts are related to or tied to sales, forecasting sales can help a company make other financial decisions that support achieving its goals.
Financial Modeling
Financial modeling, on the other hand, is the process by which a company builds its financial representation. The model created as a result of financial modeling is used to make business decisions. Financial models are the mathematical models made by a company in which variables are linked together; the company can modify these variables to see how the changes could affect the business.
Financial models are used for historical analysis of a company, projecting the full performance of a company, equity or investment research or project finance analysis. They are used to create pro forma financial statements.
Financial modeling takes the financial forecasts created during a company’s financial forecasting and builds a predictive model that helps a company make sound business decisions based on its forecasts and assumptions.
[Financial Modeling can be used to evaluate a number of business and investing decisions. If you are interested in learning to build these models yourself and get ahead on your career check out Investopedia Academy’s Financial Modeling Course. You will learn to build a model after your very first lesson and have access to hour of professional, on demand video content.]