The good news is that it’s not as scary as it looks. Almost every model you’ll come across falls into a handful of buckets, and once you know what each one is for, the whole thing starts to click. So let’s walk through the main types of financial models, what each one does, and where you’d actually use it. Think of this as a friend explaining it over coffee, which is exactly how we like to teach at The Capstone Learnings.
A Quick Refresher Before We Dive Into Types of Financial Modelling
If you’re completely new to this, start with What Is Financial Modelling and then come back. The rest of this post will make a lot more sense.
One small thing before we start: you’ll see this topic worded in a few ways, like financial model types, and it all means the same thing.
1. Three-Statement Model: The Foundation of All Financial Model Types
Here’s a quick way to know if you’ve built it right: your balance sheet should balance. If it doesn’t, something’s broken somewhere, and yes, everyone has spent an evening hunting for that one wrong cell.
Almost every other model on this list is built on top of this one. If you learn only one thing first, make it this.
2. Discounted Cash Flow (DCF) Model
You forecast the company’s free cash flows, estimate a terminal value for the years beyond your forecast, and then discount everything back to today using a discount rate (usually WACC).
One honest warning: a DCF is very sensitive to your assumptions. Nudge the growth rate or the discount rate a little, and the value can swing a lot. That’s why good analysts always show a range instead of a single number.
3. Comparable Company Analysis (Comps)
It’s quick, it’s market-based, and it’s a great sanity check for your DCF. If your DCF says a company is worth double what similar companies trade at, you should probably ask why.
4. Precedent Transaction Analysis
You’ll see this a lot in investment banking and M&A work, where the question is “what would someone realistically pay for this business?”
5. Leveraged Buyout (LBO) Model
Private equity investors live in this model, because it shows the return they’d earn (usually as IRR) under different debt levels and exit assumptions. It’s heavy on debt schedules, so it’s not the best place to start, but it’s a favourite in interviews. Investopedia covers the basics of leveraged buyouts.
6. Merger (M&A) Model
It pulls in the financials of both companies, the financing mix, and expected synergies. It’s more advanced, but once you’re comfortable with the three-statement model, it makes a lot more sense than it first appears.
7. Budgeting and Forecasting Model
It’s less glamorous than an LBO, but this is the model most finance professionals actually touch on the job. If you’re heading into FP&A or corporate finance, this is your bread and butter.
CFA vs FRM: Side-by-Side Comparison
| Model | What it tells you | Who uses it most |
|---|---|---|
| Three-Statement | How a company’s financials connect and forecast | Everyone in finance |
| DCF | What a business is worth today | Equity research, investment banking |
| Comps | How the market values similar companies | Investment banking, research |
| Precedent Transactions | What buyers have paid in past deals | M&A advisors |
| LBO | Whether a debt-funded buyout earns a good return | Private equity |
| Merger (M&A) | Impact of a deal on the buyer’s earnings | M&A teams, corporate development |
| Budgeting & Forecasting | Where the business is heading against plan | FP&A, corporate finance |
Which Financial Modelling Models Should You Learn First?
A simple order that works for most people is to start with the three-statement model, move to the DCF, and then pick up comps. After that, choose based on where you want your career to go. Aiming for investment banking? Add precedent transactions and M&A. Curious about private equity? LBO is your next stop. Leaning towards corporate finance? Get really good at budgeting and forecasting.
At The Capstone Learnings, we’re big believers in learning concepts with logic instead of memorising them, and financial modelling is the perfect place to apply that. If it helps, look at some real financial model examples from the kind of job you want. Seeing how a real analyst lays out a sheet teaches you more than any definition.
Conclusion
FAQs
The most commonly used types of financial models are the three-statement model, DCF model, comparable company analysis (comps), precedent transaction analysis, LBO model, merger (M&A) model, and budgeting and forecasting model. Each one answers a different business or investment question.
Start with the three-statement model. It’s the foundation almost every other model is built on, so learning it first makes everything else easier to understand.
A DCF values a company based on its own projected future cash flows. Comps value a company by comparing it to similar listed companies using market multiples like EV/EBITDA. Analysts often use both together as a cross-check.
Microsoft Excel is the industry standard for building financial models, though some teams also use Google Sheets or specialised software for larger, more complex models.
Yes. Budgeting and forecasting models, in particular, are used daily in FP&A, corporate finance and general business planning, well beyond investment banking and private equity.
It depends on your starting point and the model, but most people can learn the core models, three-statement, DCF, and comps — with focused practice over a few weeks to a couple of months.