Financial Modelling Glossary: Key Terms and Concepts Explained

Financial modelling has a vocabulary all of its own, and it can be intimidating when you first encounter it. This glossary explains the core terms analysts, accountants and finance professionals use when building models and valuing businesses, in plain English. Follow the links for deeper guides on the bigger topics.

Model structure

Three-statement model

A model that links the income statement, balance sheet and cash flow statement so that a change in one flows correctly through the others. It is the foundation of most financial models — see our guide to building a three-statement model.

Assumptions / drivers

The inputs that power a model, such as revenue growth, margins and capital expenditure. Good practice is to keep them clearly separated from calculations so they are easy to change and audit.

Circular reference

A loop where a calculation depends on its own output, commonly arising when interest depends on debt that depends on cash. It is usually handled with an iterative calculation or a deliberate breaker switch.

Valuation

Discounted cash flow (DCF)

A valuation method that estimates the present value of a business by forecasting its future cash flows and discounting them back at an appropriate rate. It is one of the most widely used intrinsic valuation techniques.

Free cash flow (FCF)

The cash a business generates after funding its operations and capital expenditure. It is the cash available to providers of capital and the key input to a DCF.

WACC

The weighted average cost of capital — the blended required return of a company's debt and equity, used as the discount rate in a DCF.

Terminal value

The estimated value of a business beyond the explicit forecast period, often the largest single component of a DCF. See our guide to terminal value methods.

Comparable company analysis (comps)

A relative valuation method that values a business using the trading multiples of similar listed companies, such as EV/EBITDA.

Precedent transactions

A relative valuation method using the multiples paid in past acquisitions of similar companies, typically including a control premium.

Metrics and multiples

EBITDA

Earnings before interest, tax, depreciation and amortisation — a proxy for operating profitability widely used in multiples. See our explainer on EBITDA.

Enterprise value (EV)

The total value of a business to all capital providers — broadly equity value plus net debt — used in multiples like EV/EBITDA.

Net present value (NPV)

The value today of a series of future cash flows discounted at a required rate, after deducting the initial investment. A positive NPV indicates value creation.

Internal rate of return (IRR)

The discount rate at which an investment's NPV equals zero — a common measure of expected return, especially in private equity.

Techniques and analysis

Sensitivity analysis

Testing how an output, such as valuation, changes when one or two key assumptions are varied. It shows which drivers matter most.

Scenario analysis

Modelling distinct combinations of assumptions — for example base, upside and downside cases — to understand a range of possible outcomes.

LBO (leveraged buyout)

An acquisition financed largely with debt, modelled to assess the returns to equity investors. LBO models focus heavily on debt repayment and cash generation.

Accretion / dilution

Analysis of whether a merger or acquisition increases (accretive) or decreases (dilutive) the acquirer's earnings per share.

Cost of capital and supporting schedules

CAPM

The Capital Asset Pricing Model, used to estimate the cost of equity as the risk-free rate plus beta multiplied by the equity risk premium. It feeds directly into the WACC.

Beta

A measure of how sensitive a company's returns are to the wider market. A beta above one implies greater volatility than the market, and it is a key input to CAPM.

Revenue build

The detailed bottom-up forecast of revenue, often broken down by volume and price or by product line, rather than a single growth assumption. A robust revenue build makes a model far more credible.

Working capital schedule

A supporting calculation that forecasts receivables, payables and inventory, capturing the cash tied up in day-to-day operations and its effect on cash flow.

Depreciation schedule

A supporting calculation that tracks capital expenditure and the resulting depreciation over time, linking the balance sheet, income statement and cash flow.

Mastering these terms is the first step to building and interpreting models with confidence. For structured, practical training in financial modelling and valuation, explore our finance and modelling CPD courses.