Financial Modeling World Cup- A Complete Overview
Move over “Call of Duty”, and “League of Legends”! There’s a new kid in town! Make way for a new unexpected candidate in the E-sport (Online Gaming) arena – Microsft Excel! This humble software used for crunching numbers all around the World is now being considered a Sport. Watching a live stream of the Financial Modeling World Cup is reminiscent of catching a ballgame on TV. There are announcers, live commentary, and a scoreboard. Do you consider yourself a whiz in Finance? Is preparing abstract models to crack financial puzzles your jam? Then The Financial Modeling World Cup is where you should be headed.
Financial Modeling World Cup or FMWC is an annual competition that began in the year 2020 for people who are interested in finance and preparing financial models. Participants from all over the World come individually or in teams to solve real-life financial problems using Microsoft Excel spreadsheets software. These competitions are held in stages throughout the year and there are attractive prizes to be won at the end of every stage.
What is Financial Modeling?
Financial Modeling is the designing of Mathematical models to show the real-life financial situation of a business or a project in a simplistic manner. These models can be used as risk analysis and decision-making tools for financial operations. Financial analysts use these models to calculate the costs and anticipate future profits of new projects.
They help to forecast the impact of economic policy, company restructuring or policy change, or any other calamities on the company’s stock. Financial models are also used to analyze how a business fares in comparison to its peers. The key to effective financial modeling is to have solid templates and a strong understanding of corporate finance.
A financial model is built on Excel Spreadsheet from scratch or an existing model is used with newly available data. To be able to work on the model, a user needs to have an in-depth understanding of Excel Software and the principles of Finance. An efficient model is one in which individual parts can be worked upon without the entire structure coming crashing down.
It might seem a bit complicated at the outset but one can master the technique gradually with practice. A dedicated study of Equity Research reports (which are available free of cost and help in understanding the stock, commodities, and bond markets) is a good practice to cultivate.
Another way to hone financial modeling skills is to take a company’s historical financials, build a basic model and calculate the value of its current share price and compare it with its actual price in the stock market. The models are built using financial statements by Financial Analysts or ‘Number Crunchers’, who develop their own methods for financial modeling.
Although there is other software in the market, Excel Spreadsheets are highly used by companies. This is not a fool-proof method. Sometimes the fault lies in the model which doesn’t take into consideration every possible internal and external factor and at other times the modeler simply lacks the programming skills to provide a strong, collapsible structure to the model.
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Why is Financial Modeling Necessary?
Financial Modeling is generally used for
- Financial Risk Management
- Growing a business (opening new stores, entering new markets, etc.)
- Valuation of a company
- Valuation of Assets
- Mergers and Aquistions
- Budgeting and Forecasting (making future plans for the company)
- Capital Allocation (where should the money go)
- Raising Capital
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How to Build a Financial Model?
Financial Modeling is a repetitive process in which the modeler chips away at individual parts of the algorithm to get a free-flowing whole. Here are the basic steps that need to be followed to build one such model.
- Historical Results and Assumptions – Start by pulling 3 years of financial statements and entering them into the Excel Spreadsheet. Then figure out the forecast assumptions for the historical period by calculating the revenue growth rate, variable costs, fixed costs, etc. Use the assumptions as of the codes.
- Start the Income Statement – Using the forecast assumptions, calculate the top of the income statement.
- Start the Balance Sheet – With the top of the income statement ready, work on the balance sheet.
- Build the Supporting Schedules – Before the completion of the income statement and balance sheet, other factors like debts and interest need to be scheduled.
- Complete the income statement and balance sheet
- Build the cash flow statement using the income statement and balance sheets
- Perform the Cash flow analysis next
- Sensitivity Analysis – After the above-mentioned steps are completed, it’s time to determine how the company’s value will be affected by changes in internal and external factors.
- Build Charts and Graphs- Charts and Graphs are an effective means of showing the results of a financial model as busy executives don’t have the time or the patience to look at cumbersome models.
- Stress-Test and Audit the model – Your work is not over once the model is ready. It needs to be tested for all kinds of situations to see if it behaves as expected.
Categories of Financial Modeling
Different categories of Financial Models solve different Business problems. The majority of them are used for valuation, but some are used for risk analysis, portfolio management, and the study of economic trends within an industry or a region.
- Project Finance Models – This category of financial models is used to assess the economic feasibility of a project. While the output of this model is uniform and accounting rules determine the calculation algorithm, the input is specific to each project.
- Pricing Models – This category is built to decide on the price of a product. The input to this model is the price, and the output is the profitability. The cost of production sets the lower limit and consumer perception about the product or the service sets its upper limit.
- Integrated Financial Statement Model – This category of the financial model are Also known as a three-way financial model, the 3 kinds of financial statements that are included in this type of modeling are- income statement, cash-flow statement, and balance sheet.
- Valuation models – These models are used to assess businesses for the purposes of mergers, acquisitions, restructuring, and so on. The people who build these kinds of models are known as deals modelers.
- Reporting Models – This category of models creates a report of the history of a company’s revenue and expenses.
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Types of Financial Modeling
Here are Some of the most commonly used financial models-
- Three Statement Model – This kind of modeling connects the income statement, balance sheet, and cash-flow statements into one cohesive financial model. It forms the backbone on which other more advanced models are built and falls under the categories of both Reporting and Integrated Financial Statement models.
- Discounted Cash Flow (DCF) Model – This type of financial modeling falls under the Valuation models category and is used to evaluate a business. It takes the sum of the future cash flows from the three-statement model and discounts it back to today’s value to give the company’s current NPV (Net Present Value). If the NPV of the sum of future cash flows is higher than the current value, then the option is profitable.
- Merger and Acquisition Model (M&A) – Another Valuation model, M&A is used to figure out the effect of a merger or an acquisition on the earnings per share (EPS) of the newly formed company.
- Initial Public Offering (IPO) Model – Investment Bankers prepare this type of Model in Excel to value a business before it goes public. This model compares the company’s current financials with how much the investors will be willing to pay for it when it goes public.
- Leveraged Buyout (LBO) Model – In a leveraged buyout, acquisitions are made using loans. Hence cash flows from the acquired company are first used to pay off the debt. The LBO model is used to calculate the profits that can be generated out of such debt-ridden deals.
- Sum of the Parts (SOTP) Model – Valuation of large Corporations is a gargantuan task using one single model. So each segment is evaluated separately and then the sum of the value of individual segments gives the valuation of the entire corporation as a whole.
- Comparative Company Analysis Model – Analysts look at other companies of similar size for the valuation of a particular company.
- Budget Model – Used in Financial Planning and Analysis (FP&A), this financial model is used to prepare a budget for the next few years.
- Forecast Model – Similar to the Budget Model, the Forecast Model is used in FP&A to generate a forecast. Both Budget and Forecast Models fall under the Reporting model category of financial models.
What Are the Prerequisites to Learning Financial Modeling
To prepare a successful financial model, one needs to have a certain specific skillset.
- An understanding of Accounting Concepts and rules like US GAAP, IFRS, etc.
- Excel Skills like how to use the different formulas, keyboard shortcuts, etc.
- An ability to link the different segments of a complex Model so that numbers flow freely from one statement to the other
- Good Forecasting Skills or a better understanding of the future of any financial situation increases the dependability of a model
- An ability to keep the clarity and simplicity of the model intact while also providing all the detail is of great importance.
From Where Can You Learn How to Do Financial Modeling?
Many Educational Websites offer online and offline courses where you will be able to learn about Corporate Finance, Excel, Report Writing, and Accounting. The wide range of in-depth courses will help you figure out how to prepare financial statements and understand business transactions in different sectors like Banking, Real Estate, Capital goods, etc.
Excel offers a step-by-step guide to preparing a financial model. It teaches you how to prepare core statements like Cash Flows, Income Statements, and Balance Sheets and connect them with the supporting programs to create a complete financial model. Another way to learn Financial Modeling is to participate in the Financial Modeling World Cup.
What is Financial Modeling World Cup?
Based in Latvia, Financial Modeling World Cup is an annual financial modeling competition founded by Andrew Grigolyunovich, who obtained his CFM (Chartered Financial Modeling) in late 2018 and is a grader and content creator of the FMI (Financial Modeling Institute).
This World Cup started with the idea of creating a series of real-life financial modeling cases to help people get better prepared for financial modeling exams. The competition component was added to encourage the most experienced modelers and the learning component was added for the inexperienced but enthusiastic modelers.
Financial Modeling World Cup has 3 Main Goals
- Teach – Make sure that all participants improve their financial modeling skills by solving case studies and reviewing the answers provided by the FMWC.
- Train – Train them for the financial modeling certification exams.
- Compete – Promote healthy competition and find out the specialists in this industry.
Every month the FMWC participants receive 3 financial modeling cases. Some of the cases will cover topics from the FMI’s (Financial Modeling Institute is the World’s leading financial modeling accreditation program) Body of Knowledge for Level 1 AFM (Advanced Financial Modeler) and Level 2 CFM (Chartered Financial Modeler), so it’s another way to train for FMI Certifications.
They are supposed to create a financial model to solve them within the timeframe of 2 hours. There will be 1 to 5 pages per case. Each case will have between 4 to 20 questions. The complexity of the questions will vary, with more complex questions being awarded more points if answered correctly.
They can be multiple-choice or number type-in. None of the questions will require essay-type answers. Cases can be conventional, freestyle, or out-of-the-box. Participants might be provided a basis for the financial model or asked to build one from scratch. The sample cases on the FMWC website give an idea of what to expect.
A case called “Jet Hockey” requires participants to calculate the positive effect of an Ice Hockey World Championship on the economy of a country, in this case, Latvia. After a stage is completed and the results published, the solutions will become available within a reasonable time for free to the participants.
Non-participants will be sold the cases and solutions separately on the Financial Modeling World Cup Website. While most participants in the rewards are given at the end of every stage for the winners, there are people who sign up just to get the cases and the solution files so that they can practice at their own pace.
According to Lianna Gerrish at RateMyExcel.com, Financial Modeling World Cup provides a wide variety of cases- from a standard finance evaluation, a weird piece of Excel gymnastics, or just a complete wildcard question. The different tactics needed to solve the questions keep it highly exciting.
While every stage provides a small prize to the winners, the major part of the prize fund is awarded based on seasonal rankings to the overall winners. At each stage, participants can score a maximum of 1000 points but sometimes extra points are awarded for solving more complex questions.
Time Bonus is awarded for those who finish early. If a participant solves all the cases before the 2-hour deadline, a bonus of 10 points is awarded for each full minute saved. After a stage is over, participants will have to upload their models. FMWC utilizes an internal ranking system based on the participants’ performance.
Participants will be ranked globally based on the total number of points scored in a particular season in his/her best 6 stages (the 2 worst performances will not be counted). Therefore, the maximum amount of points that is possible to score during the 2022 season is 6000 (excluding any time bonus points and extra points).
The Regional rankings follow the same procedures and rules as the World Rankings. In addition to regular individual rankings, team rankings will also be awarded. The organizers have the right to change any rules at their discretion. The entry fee at every stage is $20 for the Open age group and $15 for the U-25 age group. A seasonal pass for FMWC 2022 is available at a discounted rate.
September 2020 marked the debut of the FMWC. Joseph Lau from Australia was the winner with 5535 points. In the year 2021, Stage 1 wasn’t very difficult but was time-consuming if you chose the wrong approach to solve. The participants began with a warm-up case called ‘Speed it up Wendy’ consisting of 5 straightforward questions that could be solved with the basic financial modeling techniques.
The second case called ‘Stack a unicorn’ gave 400 points to model a cap table (Capitalization Table, showing who in the company owns what) for a tech startup. The 3rd case, the Headcount Analysis, required the participants to analyze a variety of personnel data for a company managing outsourced call centers and gave 450 points.
Similarly, other stages involved other real-life cases with the first case being a warm-up case containing several unrelated tasks that covered specific financial modeling topics to be done fast and get in shape before approaching the big sharks. In 2021 the total prize money was 20000 USD. Diarmuid Early from the USA was the winner. India’s Anup Agarwal was the runner-up.
This year the prize fund is 25000 USD and the number of stages has been reduced from 12 to 8. Apart from the usual stages of the competition in financial modeling, Financial Modeling World Cup occasionally broadcasts live ‘Excel as Esports’ battles between Excel users. In Esports the FMWC pits Excel aficionados against each other.
No financial modeling knowledge is necessary to participate in or watch these competitions. It involves Excel Freestyle Modeling. Participants will have to prepare calculations in the financial model assigned to them in 40 minutes. They will be given a business case that will need to be solved by creating a financial model and answering questions related to the model.
This competition is open to all participants irrespective of age, race, gender, country of origin, or any other factor. Participants will be divided into groups based on their age: U-25 and Open. Review all the legal documents on the website to get a complete understanding of the rules and regulations to be followed before participating in the Financial Modeling World Cup.
1. What is Financial Modeling World Cup?
FMWC is an annual competition in financial modeling that promotes education and competition. Participants answer a wide range of questions and perform a number of tasks related to financial modeling.
2. Who can participate in Financial Modeling World Cup?
Anybody can participate irrespective of their age, gender, race, etc.
3. When does FMWC take place?
It occurs every year. Each year is called a Season and the Season of 2022 is divided into 8 monthly stages. The next stage of the World Cup happens between June 10 to 13.
4. Where does Financial Modeling World Cup take place?
It takes place online. At the beginning of every stage, participants receive an email with a link to the examination platform.
5. How to register for the competition?
Go to fmworldcup.com and click the Shop button. You will have to pay the registration fees for the particular stage.
6. When does each stage begin and end?
Each stage of the FMWC starts on Friday at 00:01 AM (UTC +0) and lasts until Monday at 11:59 PM (UTC+0). Once the participant begins a stage, they will have a 2-hour window to complete, during which time they have to download all the relevant materials, read the case, analyze it, create financial models and answer questions.
FMWC is an annual online Modeling competition for finance enthusiasts whose main goals are to Teach, Train and Compete. There’s no better platform for number crunchers to sharpen their financial modeling skills or to compete with other modelers to win exciting prizes.