A Complete Guide To Financial Modeling Career, Scope & Details
What is Financial Modeling?
Financial modeling is a structured mathematical representation of data about an organization incorporating all vital components that encompass the financial aspect of a business. In other words, It is the archetype of a company’s earnings and expenses, an abstract representation laid out in spreadsheet software to convey core points about the financial situation of the organization. It is made in order to forecast the future performance of the business and to undertake vital activities based on historical information.
A financial model is an invaluable compendium for business organizations to help them make better decisions, perform better, and to forecast future possibilities both positive and negative.
Topics Covered In This Article
- Utility of Financial Modeling
- Financial Modeling Concepts
- Scope of Financial Modeling
- Sectors That Require Financial Modeling
- Job Opportunities In Financial Modeling
- Skills Required To Become A Financial Modeling Expert
- 10 Step Guide To Financial Modeling
- Best Practices In Financial Modeling
- 3 Step Model In Financial Modeling
- Valuation Methods
- Financial Modeling Course
- Who Can Pursue This Course
- What To Look For In A Financial Modeling Course
- FAQs On Financial Modeling
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What are the utilities of Financial Modeling?
Financial modeling helps to get clarity on several matters pertaining to a business. It helps to make important decisions regarding the steps that should be taken for the welfare of the business.
The utilities of financial modeling are delineated below:
1. Estimation of the Value of the Company
Financial modeling helps in estimating the value of the company which then facilities taking important decisions like raising capital and investing in stocks, and other assets. You also get an in-depth report of the assets and liabilities of your company. A financial model is replete with a multitude of relevant information like capital allocation, budgeting, forecasting, and gauging the overall footprints of the business.
The valuation of a company is generally calculated by subtracting the sum of outstanding liabilities from the value of the assets of the company.
Assets – Liabilities = Net Value
2. To Raise Capital
You might want to raise capital for your business. Raising capital is simply the process of procuring money from different sources to fund your business organization and your projects. Resources can be banks, investors, and lenders among others. Financial modeling enables you to understand whether it is feasible for you to raise this capital and how much you can procure after assessing the risks associated with such activity. You can also opt for equity financing.
Financial modeling plays a major role in deciding on mergers and acquisitions. Complete Research and evaluation of the financial situation of the business that you want to buy is important before starting the process of acquisition. This entails understanding the legal liabilities, their operations, assets, the brand value, their team, and their contribution to their respective sector. Financial Modeling also helps with having a proper integration plan in place.
4. Comparison with Competitors and Peers
Financial modeling ensures that you have a clear idea about where you stand with respect to your peers and competitors in the industry.
5. Minimizing Risk
Financial modeling helps to identify the risks in a business and the impact they will have in the long run. They also provide you with the answers and solutions to these challenges. Risk in business may include factors like product life cycle, manufacturing & processing, cost of marketing, capital expenditure, fluctuations in the stock market, production prices, etc. Through sensitivity and scenario analysis in the financial modeling structure, you can help identify the risks for a business.
6. Periodic Evaluation of The Performance
Financial modeling is a great tool when it comes to assessing the performance of the business from time to time. It helps to get an idea of whether your decisions are bearing fruit or creating challenges along the way. This way, you can take precise measures periodically to facilitate growth and smooth operations of your business activities.
7. Understanding the Strengths and Weaknesses of The Business
It goes without saying that financial modeling helps you to ascertain the strengths and weaknesses of your business. It highlights your strengths and detects your weaknesses, thereby giving you details on how to work on the issues and turn them into your strengths.
8. Determining A Pragmatic Funding Strategy
With financial modeling, you can create a sound funding strategy that delineates the financial requirements of your business in a certain period of time. Through financial models, you can detail a plan for the near future (3-5 months) and strategize on a plan of action. In the case of new start-ups, Financial modeling helps to make important decisions like whether to bootstrap your company or look for external investments like loans, crowdfunding, getting in touch with an Angel investor, and applying for loans and schemes provided by the government and so on. Financial modeling provides you with how to expedite your financial decisions and what you can do to further bolster your business without maximizing risks.
9. Prioritizing Projects
Based on the predictions of your financial model, you can prioritize your projects and start working on them according to their potential of generating value for the business.
10. Management Accounting
Financial modeling helps managers and superiors in a business make critical decisions based on the accounting information of the business to strengthen and manage the business in the best way possible.
You may also want to check out the Top Online Financial Modeling Courses In India
Some concepts To Familiarise Yourself With Financial Modeling Structure
Discounted Cash Flow
Discounted cash flow is the process by which an organization evaluates the value of an investment on the basis of the projected cash flows. Discounted cash flow analysis helps to predict the true value of an investment in the present time by determining how much money it will create in the future. It is a great determinant in deciding which stocks and companies to invest in. It is also a great valuation method for business organizations to decide on factors like capital budgeting and expenditures.
Leveraged Buy out is when a business organization acquires another company with loans or debt as the main source of finance in the deal. The best companies are companies that are stable with a predictable performance rate. Non-cyclical companies are ideal for leveraged buy-out since the demand for the products of such non-cyclical companies does not go down during an economic crisis or downturn.
Consumer goods are prime examples of companies ideal for leveraged buyout. It is generally an occurrence with private equity firms where these companies acquire other companies with a majority of the money from loans.
For the remaining amount, they use their own equity. Coming to its relevance in financial modeling, financial models help portray a true picture of the company’s financial position and help the company decide on whether a leveraged buyout is the way to go.
Mergers and Acquisitions
Acquisitions and mergers are the two most common forms of financial deals that occur in the corporate world. Sometimes these two words are confused to be synonyms for one another. But there are some vital differences in the character of these two financial transactions for a business.
A merger as the name suggests is the merging of two separate businesses to create a completely new organization. Mergers generally happen between companies of equal sizes and include voluntary surrendering of The identity of these two business organizations to create a new one. Members and professionals from each form then become a part of the management of the new organization.
An acquisition on the other hand is the take over of one small company by another relatively larger organization. Both help in increasing the shareholder value and gaining market recognition. They are also a great way to expand the business and proliferate in the concerned sectors. However, an acquisition is almost always the situation where a larger company takes ownership of the smaller company diluting the powers of the smaller company. And Acquisitions tend to be hostile deals in the majority of situations.
In the context of financial modeling, the statements presented in the financial model help businesses decide on whether to go for mergers or acquisitions and what investments are to be made.
Simply put, sensitivity analysis is a what-if analysis to predict the outcome of a financial decision with a certain set of variables. An analyst generally works on the given set of variables and determines how changes in these variables can affect the outcome of financial decisions made.
Cash Flow Statement
A cash flow statement is a financial document that provides information on cash inflows which is the money received by a company through their investments and operations and cash outflows which is the amount of money they have to pay for carrying out diverse business activities, and investments in a certain period of time.
With a financial model, the cash flow statement helps the business to understand the nature of transactions that happen in the business and how each transaction relates to the company’s performance. The cash flow statement helps to ascertain the net cash flow of the business in three main ways which are financing, investments, and operations.
Before you move to the concept of option pricing, let’s look at what an option is. An option is essentially a contract that enables a buyer to have the right to buy and sell assets (applicable in the case of shares) without any obligation to do so. This can be done at a particular price on or before a specified date. Now, Option Pricing Model in financial modeling is the evaluation to ascertain the theoretical value of such an option by using variables.
Types of Options
Call is the type where a buyer has the option to buy underlying assets at a prearranged price before or on a certain date. Put is the option to sell underlying assets (stocks in most cases) in the same pre-decided pricing. Options are again classified in two types – European and American. Option pricing model helps with understanding the true value of the option. This helps in portfolio management and strategizing important financial decisions.
Consolidation Model Analysis
The consolidation Model as the name suggests is a type of financial model where all the financial results of each project and business unit are taken together and a consolidated business model is created. This includes taking into account revenues, costs, profits, ROI, etc). There are several steps to creating this business model including validating data with the financial documents of the business units, calculating figures using the information available, and summarising the data to create a unified financial document that reflects the position of the business. The consolidation Model uses graphs and charts to disseminate information received in a clear manner with zero chance of confusion.
IPO or initial public offering is when a private enterprise offers shares of the business to the public thereby making the company public. It is o great way to expand the business, raise capital, and appeal to investors. All of this helps in increasing the brand value of the business and creates a stir giving the company visibility and the advantage of transparency. IPO s generally facilitated through investment banks after thorough assessment and compliance with regulatory laws and requirements.
Sectors That Require Financial Modeling
You want to invest in the shares of a company, but you know little about the company’s business environment and financial statements. Equity research is when you make an in-depth analysis of a company to make an informed decision on whether investing in shares is a good decision or not. S
Some of the things that are taken into account while doing equity research on cash flow statements are the financial statements, how the business aligns with the current trends in the financial sector, disclosures, and projections.
Investment banking is a form of Banking where investment banks raise capital for a corporation, institution, or government from investors by underwriting new debt and equity securities. They also facilitate mergers, acquisitions, restructuring, and reorganization of companies.
Investment banks are involved in negotiating transactions and trades for diverse institutions and industries. Investment bankers dabble in consultancy, banking analysis, capital market analysis, research, and trading and have deep knowledge of the entire financial domain.
Financial modeling comes to great advantage for investment banking activities because it helps to anticipate the outcome of an event on a company’s equity by taking into account both internal (rate of interest on loans, third party funding), and external factors (Inflation).
Portfolio management is the skill of handling financial assets and products of an individual or company so that they make maximum returns with minimum risk over a period of time. Portfolio management helps in the investment for guaranteed Returns. Financial modeling can help organizations make this decision by thorough research on the best investment options available. This is done by finance professionals who are very well informed and equipped to handle investment activities. Financial portfolio modeling can be a great way to attain the desired objective of Returns on investment for an individual or business organization.
Credit research is an extensive analysis of a company’s financial position by analyzing the financial documents and focusing on a company’s credit history to understand its brand value and creditworthiness. This comes to use when companies apply for loans since based on credit research analysis, the lender would decide on whether offering credits or loans to the company is feasible. Some of the factors taken into consideration for credit research are the history of credit and loans, the financial situation of the company, and the alacrity with which the applicant had repaid the loans previously.
Financial modeling helps to ascertain important components of corporate Finance like the cost of capital, return on invested capital (ROIC), and operations. This helps to paint the entire picture of the financial position of the organization and helps with making important resolutions.
Scope of Financial Modeling And Financial Modeling Course
The scope of financial modeling is mammoth in today’s global scenario. With a number of startups and small and medium businesses coming up in the Indian market, it becomes crucial to make smart investment decisions and bolster the performance of the business to sustain it in the long run. Financial modeling is a tool that does just that. With various advanced features, financial modeling takes into account historical data and presents a business model that helps any corporate entity, big and small to make viable decisions that provide great returns on investment (ROI).
Financial modeling is a career avenue that provides a plethora of opportunities for people with expertise in this area. Banks, equity firms, business organizations, and credit rating agencies, all require the services of financial modeling experts who would help them make astute decisions where their business is concerned.
In a financial modeling course, you get the latest relevant knowledge that gives you complete clarity on the complex concepts of the financial domain. The finance sector is vast and intricate. For that, you need an exhaustive understanding of the different components that encompass the finance and accountancy departments of a business.
Financial modeling experts earn anywhere between 3 lakhs to 5 lakhs on an average which can go up to even 12 lakhs as you gain experience and accuracy in creating various advanced financial models. Thus it is evident that this arena of work provides plenty of room for growth, and development with the remuneration commensurate with your abilities, skills, and dedication.
One of the most remarkable characteristics of the financial modeling skillset is that once you get the requisite experience in the domain, and are able to create high-grade accurate financial models, you can start your own freelance business and work with multiple clients creating financial models for them.
You are not restricted to any particular organization and can choose to work on your own terms and conditions. You can also turn into a mentor cascading your knowledge, education, and experience effectively to budding financial modelers.
However, achieving the pro-level of efficiency requires time, commitment, and sincerity while working with financial models in your initial years.
Job Profiles and Career Opportunities In Finance Modeling
Corporate Finance/Mergers and Acquisitions Expert
Here, a financial modeling expert advises clients on mergers acquisitions and corporate finance. They conduct research on the finance sector as well as the companies which are involved in mergers and acquisitions. This includes determining the value of a company, carrying out a SWOT analysis, and competitor analysis, and highlighting the advantages and risks associated with such mergers and acquisitions
Investment Banking Associate
Investment banking associates are involved with ensuring that the business or individual invest in assets that are going to reap excellent results in the long run. They prepare and review materials including pitch books, presentations, and memorandums for clients.
They also ensure that all investment decisions are taken after exhaustive qualitative as well as quantitive research on the market trends relevant to the industry and after competition analysis. Pragmatic planning and analysis is a huge part of investment banking and every investment banking associate ensures efficient and strategic planning for their clients.
A Research analyst is involved in company profiling, researching, about the industry and sector for clients. Their entire work encompasses detailing and gleaning intricate details, they carry out financial model testing and create models from scratch to determine the viability of such models.
Equity research analyst/associate
An equity research analyst or associate provides a comprehensive report on the stock market. They conduct exhaustive research on the trends in the stock market industry and help investors with making vital decisions that include purchasing, selling, and retaining certain stocks. The process of research includes understanding the company, the industry, financial statements of the business, valuation of the business, and the economy extensively to be able to provide accurate advice to investors regarding their investment decisions.
Since they aid investors and corporate companies and other organizations with strategy and tips regarding the stock market they should be well equipped to comprehend the world of stocks and analyze them. They should apprise the business of any risk associated with the stocks concerned and provide a detailed review of the stocks concerned. It is crucial to be aware of the market trends and to monitor the performance of the stock since the stock market is volatile and prone to sharp changes.
Financial planning and analysis
For financial analysts, business Forecasting is their forte. With an extensive knowledge of the workings of the financial sector, these prolific individuals are involved in making critical decisions regarding operations, capital, finances, and the overall strategy of the business. They have to be well versed with technical know-how and advanced Excel to make financial predictions that are sustainable and help the business to proliferate.
Credit analysts/Researchers help with assessing the credibility of an individual or company to understand whether they are going to be able to fulfill its financial obligations in the future. A credit analyst’s job profile requires them to obtain data and information about the company’s financial and credit history to be able to understand their financial standing and ability to repay the debts given to them by a lender. This evaluation is done by taking into account financial ratios and performing qualitative as well as quantitative analyses to understand the different parameters better in the context of the business and the financial situation of the business.
Some of the financial ratios are as follows:
- Liquidity Ratio
- Profitability Ratio
- Market Value Ratio
- Leverage Ratio Among Others.
A personal finance expert enables an individual to make wise decisions regarding their investments to amplify their chances of getting exceptional returns on investments. This might include investing in shares, bonds, and mutual funds among others. They also offer advice on the client’s long-term financial goals and objectives and risks involved in investments. They offer tips on tax management and tax laws and help ascertain the investment opportunities for the short term as well as long term. Personal finance experts can create financial models for individuals to give them clarity on what needs to be done to improve their finances.
Debt Syndication expert
The responsibilities of a debt Syndication expert are to manage the pricing and ensure smooth marketability of transactions. They act as a bridge between the business and the market. Debt syndication is when a business borrows a loan from several lenders, a bank being the mediator between the lender and the business.
They are the lead arrangers who facilitate smooth communication and operations between a lender and the business. Debt syndication experts assist with the preparation of complex financial models, help with creating project reports and maintain dialogues. These experts have an intensive understanding of the capital markets, investment banking, and financial products and help with making sagacious decisions for the business. Their tasks include the preparation of drafting memorandums, and financial presentations, providing the client with details regarding the merits demerits, and risks involved with transactions. They also help in creating judicious syndication strategies.
Best Practices in Financial Modeling
1. Planning Beforehand
Having all the historical data and information in place, gleaning as much information as you can about the relevant industry, sector, and business gives you an edge over other financial modeling professionals. You have all the information at your fingertips and can make precise calculations and assumptions that help the business with pertinent decisions regarding assets, capital, and cash flow among other things.
2. Determine The Elements Of Your Financial Model Accurately
Since data simulation is the basis of financial modeling, one has to be very careful with determining the key metrics that would help to make informed decisions regarding the future of the business.
Payback Period, Churnout Rate, Cost of Production, Cost of acquiring New Customers, Profit from each customer, ROI, IRR (Internal Return Rate), cash flow, NVP, inventory returns, and debt to equity ratio are important parameters that speak of the company’s performance.
3. Test your Model
A financial model should be tested to determine its accuracy. You should work towards creating a realistic model that can be implemented and can reap results for the business. Detailing, and precision every step of the way hold the key to success.
4. Integration of the 3 financial documents is a must
This is the first step to creating more incisive and advanced financial models like the DCF model, leveraged buyout model, and others. Hence integrating the 3 financial statements (Income statement, cash flow statement, and balance sheet) is a prerequisite for accurate decision making and analysis of the true position of the business.
5. Revise and Recheck After Creating the Financial Model
A financial modeling analyst will have to revise, recheck and look for errors after finishing the model. This is a mandatory step since this financial modeling tool goes a long way in identifying the strengths and helps to smoothen out operations, and activities.
6. Convey Information Without Any Ambiguity
Simplifying, breaking down complex financial information, jargon, and terms, and conveying the information to everyone interested in a concise manner is of the utmost importance. Not everyone is familiar with complex financial glossary and terms. To bring everyone on the same page, it is vital that information is disseminated in a manner easy for everyone to process, and retain.
7. Provide Solutions
One of the most important things for financial modeling is to offer solutions for the challenges that come out with the financial documents. It is the task of a financial modeling expert to not only highlight the issues but strategize and offer techniques to resolve them.
Financial Modeling Praxis – a 10 Step Guide
i) Historical Data, Outcome, and Assumptions
To create a financial model, the first step is to determine historical results by taking into account approximately 3 years of financial statements of the company. You then incorporate this into software like MS Excel to be able to calculate the financial modeling structure for the coming years. Remember, all the historical data you acquire, should have gone through a rigorous auditing process previously to avoid wrong notions about the company’s past information.
Calculate gross margin rate, revenue growth rate, variable costs, fixed costs, inventory days, accounts payable days (AP days), and other parameters to be able to make the correct assumptions about the company’s performance in the future. This will also entail understanding the business trends and analyzing the company’s capabilities taking into account such trends. Next, you can fill in the sheet with your assumptions for budgeting and forecasting for a specified time period.
ii) Income Statement
The next step is to prepare and calculate the income statement. This includes calculating the gross profit (Cost of goods sold -revenue) operating income (Gross profit – Operating Income) and Net profit. Remember all of these have to be calculated up to profits before EBITDA ( Expenses before interest tax depreciation and amortization). The income statement will help you in generating all the other vital financial documents.
iii) Balance Sheet
The third step in the process of financial modeling is to start preparing the balance sheet. Now that you have the data of the income statement in place, you can start filling up the balance sheet. This includes calculating inventory account receivables, AR days, ( Accounts Receivable Days), and inventory days assumptions. The accounts payable (AP) section will be filled next. This is a function of the cost of goods sold and the accounts payable days.
iv) Detailed Itemizing Of Contents In An Account
This step comes before completing the income statement and balance sheet because you have to fill in these two after calculating certain components like capital assets, plants, and equipment (PP&E) property, debt, tax, and interest. This is also called support schedule since it supports the financial statements with the disclosure of vital additional information.
The property plants and equipment schedule will be taken from the historical period. Capital expenditure will be added to it and depreciation subtracted.
You will also have to consider the debt schedule from the historical period. Then you will have to add increases in the debt and subtract the repayments.
v) Preparing The Income Statement Along with The Balance Sheet
Once the supporting schedule is sorted, the income statement and balance sheet can be completed with the information received from the supporting schedules. The supporting schedule acts as a supplement for both these documents.
Now depreciation can be linked to the plants and equipment table as well as the debt interest table. With this, you are able to calculate the profits before taxes as well as taxes and the net income.
On the balance sheet, you have to link the closing balance to plants and inventory. Withdrawing the closing balance of the last year, add capital that has been raised and the net income. Subtract the shares and profits repurchased. You will get a complete picture of the shareholders’ rights, in other words, the shareholders’ equity.
vi) Cash Flow Statement
Here you have the income statement and balance sheet complete. The balance sheet does not contain cash and bank balance. With this information available on the balance sheet and income statement, you can build the cash flow statement conveniently. The steps in this process are to start with the net income, and you then add back the depreciation.
Adjust the non-cash changes in the capital which facilities cash from operations. The cash that we use in investing is a function of the capital expenditure in the property, plants, and equipment table. And cash from financing is the function of the assumptions that were made about raising equity (ownership) and debt.
vii) DCF Analysis
Next is a very important step which is performing the DCF analysis or the discounted cash flow analysis. Here you calculate the free cash flow and evaluate the business performance. After this, you deduct the free cash flow of the company considering the opportunity cost which is the company’s capital cost or required return rate.
viii) Sensitivity Analysis
The sensitivity analysis is carried out once the DCF analysis and other evaluations are complete. The sensitivity analysis essentially determines how and to what extent the company’s value will be affected by changes in basic assumptions. This comes as greatly beneficial to evaluating the investment risks and business plans. This can be very effective to understand if a company needs to raise capital if sales drop by a certain percentage).
ix) Images In The form of Charts and Graphs
A graphical representation always helps to convey the information better and helps the people involved in the business to retain the information effectively. Hence, a financial analyst who carries out financial modeling for a business should always present the results of the financial model through graphs and charts professionally to be able to disseminate important information without any ambiguity. This would require the financial analyst to be very well versed with advanced Excel.
x) Auditing The Financial Model To Determine Accuracy
Your work does not end with creating the financial model. Stress testing is an important element to identify the proficiency of the financial model. This requires one to employ financial auditing tools to test extreme scenarios and determine if the model behaves as the business expects it to. This will further help to measure its accuracy and understand if the figures are working in the best way possible.
Skills Required For A Financial Modeling Career
Knowledge of Advanced Microsoft Excel
This is unquestionably the most important skill that a finance professional needs to master if they want to become an expert in this field. Proficiency in MS Excel is a prerequisite to job profiles concerning finance, especially financial modeling. This is because the majority of the work is implemented and executed on MS Excel sheets. The more you imbibe the knowledge of MS Excel, the more efficient you will be in designing financial models.
It requires you to understand the most basic to the advanced concepts of Excel and to continuously upgrade your knowledge to incorporate the updates in Excel in your repertoire.
Topics In MS excel To Master are as follows:
- Keyboard Shortcuts
- Index Match
- Paste Special
- Conditional Formatting
- Number Formatting
- Rows, Columns, and Cells
- Data Validation
- Table Functions
- Dynamic Arrays
- Pivot Tables
- Charts And Slicers
- Creating Charts & Graphics Including Line Charts Combo Charts Scatter Plots
- Pie Chart
- Stacked Column Chart
- Football Field Chart
- Sensitivity Analysis
- Spark Lines
- Dynamic Dashboards
- Text Functions
- Text To Column Functions
- Time Value Functions
- What-if Analysis
- Return Functions
- Iterative Calculations
- Circular Referencing, and more
Accounting and Finance Knowledge
It goes without saying that a financial professional looking for job designations in financial modeling has to unequivocally possess sharp wit and insight where finance and accounting are concerned. A keen-witted individual with knowledge of accounts and Finance will have a greater chance of excelling in a career as a financial modeling expert than someone who is not passionate about these two subjects. To become a financial modeling expert, you have to cultivate an interest in everything that constitutes finance and accounts.
You have to logically link three statements in a financial modeling project. The cash flow statement, income statement, and balance sheet have to be linked together for an organization to understand a company’s standing and other consequential elements like risk and investment decisions. It takes time to hone your skills as a financial modeler but with time, practice, and your zeal to evolve and learn, financial modeling can be your springboard to great success and income.
Topics to Learn In Finance and Accounts
- Fundamental Concepts Like Cash
- Reporting Double-entry
- Law Of Prudence
- Money Measurement
- Historical Cost Concept According To Period
- Full Disclosure
- Business Entity
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Direct And Indirect Cost Revenue
- Operating Costs
- Non-current Assets And Liabilities
- Shareholders Equity
- Current Assets And Liabilities
- Capital Expenditure
- Deferred Revenues Into Linkages And Relationship Of The Three Financial Statements
- Reading And Understanding Annual Report
- Understanding Management Discussion And Analysis
Another very vital trait is the presentation skills of an individual. This is not just confined to MS Excel but all other applications that are used for financial modeling. It can be MS PowerPoint, MS Outlook, and any other software or tool that facilities the process of conveying financial information effectively.
Presentation skills require you to analyze the information and then disseminate it to the concerned parties with impeccable accuracy. You are expected to convey vital information that will come to use in the organization in the future. And this has to be done by taking into account different parties of interest in the organization. You have to create a model that is easily comprehended by concerned members of the organization.
In-depth Understanding Of the Economy
Financial modeling job profiles require a person to understand the economy. This equipments you with the skills to understand current and future trends, and models and to apply them to business organizations and individuals to make critical decisions and emerge successful even in adverse conditions. This includes key performance indicators analysis and ratio.
Some of the concepts to keep in mind are as follows:
- Net Profit Margin
- Gross Margin
- Operating Profit Margin
- Return On Assets
- Return On Capital
- Pre-tax Margin
- Cash Conversion Cycle
- Days Of Inventory
- Total Asset Turnover
- Dupont Formula, among others.
A sharp mindset bolsters your confidence and helps you to take critical decisions after having assessed all advantages and disadvantages of the said decisions. Mental acuity is the most coveted skill for job profiles in financial modeling.
Nurturing a sharp mindset helps you to accomplish set goals and objectives and create newer objectives for your business or as an individual. As a financial modeling expert, it helps you to explore different options and focus on how to achieve the vision of the business organization.
Understanding Colour Codes and Formatting
This can be considered as a corollary to the first point. You have to possess clarity on how to color code different cells on MS Excel and to format a financial document in a manner easy for people to understand clearly. Use formulas where needed even if you have to replace values with formulas at times.
Strong decision-making skills are a must for financial modeling. Decision-making involves understanding the situation well and creating a solution in an organized structured manner.
You glean all the information you can from the financial model and create a set of possible solutions to the problem. Decision-making also entails that a financial professional be adept at forecasting skills.
It is only through exemplary forecasting skills that of financial modeling expert will be able to make decisions about the future course of the business. This requires an intuitive understanding of the dependent and independent variables and determining the influence of the independent variables on the dependent ones. The trends in data determine the relation analysis and help to make vital decisions to facilitate growth and create brand value.
Critical thinking is of the most desirable characteristics since it helps in crises. Critical thinking enables quick actions in not-so-favorable situations. This, in turn, helps the business to forecast any risk situations and eliminate them beforehand to avoid adverse outcomes.
Simplifying For Better Dissemination of Information
Distilling complex information into easily understood chunks and highlighting the points with clarity are essential skills in financial modeling. People working in financial modeling job profiles have to possess the skills of disseminating complex information by baking it down into simple forms to understand. A business comprises people from different areas of expertise and background. To help all of the concerned parties to grasp the information with complete clarity, a simplified sophisticated conveying of information is the key. Individuals with this skill can excel in the financial modeling department and gain success in a very short period of time.
Solution-Oriented Thinking Strategy
The objective of any financial modeling document is to make assumptions to ultimately find solutions to a problem or problems. Therefore, it is imperative to have a solution-oriented strategic approach in financial modeling.
This means that you should ideate solutions for whatever predictions you make based on your research of the company and its historical data.
The job of a Financial Modeling Analyst/Expert
- The financial modeling analyst is responsible for gathering historical data and helping to provide assumptions based on different business-related factors.
- They conduct thorough research and then recommend changes and improvements to help prepare the company for its upcoming projects, cost, and expenditure.
- They prepare financial models that do away with all ambiguity and help the company to identify its strengths and weaknesses, strategizing and recommending tips to propel the business towards growth and mitigate any risk.
- They glean all the information about the business and carry out sensitivity and scenario analyses to help assess and minimize risk factors.
- Financial modeling analysts create and update existing financial models periodically incorporating the changes that happened in the business as well as the corporate sector.
- They help with advice on capital allocation, estimation of the company, and perform a plethora of activities like comparative analysis, analyzing investment opportunities and risk, and linking the three statements income statement, cash flow statement, and balance sheet to prepare an advanced consolidated financial document that incorporates all vital information pertaining to the business.
What is the 3 Statement Model
It is an integrated and structured financial statement/model to decide the financial standing of an organization in the long run as a whole.
Some of the popular financial models are as follows:
- Discounted Cash Flow Model
- Option Pricing Model
- 3 Statement Model
- Merger And Acquisition Model
- IPO Model
- Credit Rating Model
- Comparable Analysis Model
Some of the valuation methods in financial modeling are as follows:
- DCF Model
- Precedent Transactions Analysis
- Comparable Company Analysis
- Market Approach
- Historical Earnings Valuation
- Relative Valuation
- Asset Valuation
Financial Modeling Course – Advantages and Expectations
In the present professional scenario, financial modeling is one of the most sought-after courses in not just India but globally. A financial modeling course equips finance professionals with the skills to develop financial models and execute a variety of complex financial documents with ease. Financial modeling is the activity or task of creating a representation of the real financial situation of a business. It is an incisive mathematical summary that delineates the financial standing of a business along with giving comprehensive detail about assets, portfolio, liabilities, investments, and projects, that the business has undertaken.
This includes evaluating the company’s performance based on historical assumptions and risk analysis, SWOT analysis, evaluation of the company decisions, budgeting, and forecasting to avoid impediments that might hinder the goals and objectives of the business.
Financial modeling courses generally use Excel to create complex financial models. This ensures that students understand the applicability of the different elements that make up the financial system of an organization. It also enables students to get well versed with different financial concepts to create smooth financial models without ambiguity.
The following is a general idea about the financial modeling course. It covers information about eligibility, opportunities, course topics, and other features that an institute usually provides when a student enrolls in their course.
Eligibility to Enroll in a Financial Modeling Course
There are no strict prerequisites to enroll in a financial modeling course. However, people with a background in finance, accounting, taxation, mathematics, statistics, and economics have the advantage of being conversant with the fundamentals of financial terms, jargon, and concepts.
Also, people with a predilection for these subjects find financial modeling interesting and are adept at explaining the different financial parameters of a business. You can come from different educational and professional backgrounds and enroll in the course as well.
But you should make a thorough assessment of your strengths, skills, and interests before you join the course to understand whether the subject is suited to you.
Financial Modeling Course Topics
- Introduction To Valuation
- Comparable Company Analysis
- Precedent Transactions Analysis
- Discounted Cash Flow Analysis
- Weighted Average Cost Of Capital (WACC)
- Concluding Valuation
- Building A Consolidated Cash Flow Model
- Introduction To The Financial Modeling Structure
- Modeling Financial Statements
- Projects & Financial Statements
- Analyzing And Concluding The Model
- Understanding What Financial Institutions Are
- Overview Of Investment Banks
- Best Practices Of Financial Modeling
- Operating Revenues Expenses
- Operating Profit
- Property Plants And Equipment
- Non-Current Assets
- Forecasting Working Capital
- Understanding The Concepts Of Accounts Receivable
- Inventory Accounts Table
- Understanding How To Model Interest Expense And Debt Equity And Dividends
- What Are Circular References
- Error Checking
- Financial Modeling Practices
- Formatting Tips
- Cover Page
- Index Financial Summary
- Working Capital
- Fixed Assets
- Dilutive As Well As Anti-dilutive Securities
- Treasury Stock Method
- Valuation Output
- Valuation Report
- Post-Money Valuation Concepts
Opportunities after Completing A Financial Modeling Course
- Corporate Finance
- Investment banking associate
- Research analyst
- Equity research analyst/associate
- Financial planning and analysis
- Credit analysts
- Personal Finance
- Debt Syndication expert
What You Should Look For In a Financial Modeling Course.
Many reputed institutes today provide financial modeling courses. This coveted course comes with classroom training, online training, as well as customized corporate training. Institutes offer diverse features to students enrolling in any of these formats.
Some of the features of a financial modeling course that institutes provide to their students are as follows:
- Access to the financial modeling learning management system the portal.
- Thorough training on excel workbooks.
- Live and recorded lectures and access to the same after the course is over.
- A dedicated forum with a community of Finance professionals who can provide you with tips, strategies, and advice about financial modeling from time to time. Post-course support and engagement are vital parts of any institute to help students achieve success and confidence to create complex financial models for business organizations.
You should also get plenty of case studies, learning resources examples, and workbook simulations to help you get the hang of the various steps needed to create a proper financial model.
An Institute providing placement and internship benefits are an added advantage because they help you get exhaustive training on financial modeling as well as help you get your foot in the door with big brands and corporate organizations. The course should include absolutely basic concepts to the more advanced levels for you to become an astute financial modeling expert.
Most institutes offer financial modeling courses and also provide interpersonal skills and soft skills training for you to develop conviction in your capabilities. This benefits you with cracking job interviews in this sector since it’s a competitive industry.
Through experiential training and industry-relevant content, the institutes offer a pedagogy designed by subject matter experts to help you with the various faces of financial modeling concepts.
The institutes help to nurture your talent and bolster your resume by further providing you with Email communication strategies and presentation skills that include creating slides and presentations in Google and PowerPoint.
Additionally, they also provide you with time management skills, problem-solving, and decision-making to help you become more assertive.
Clear communication is one of the foremost requirements for a financial modeling job profile. If you are not able to communicate or convey your points in a brief, crisp, clear manner, it will not bode well for your career prospect.
Hence institutes make sure that they provide you with impeccable training and career guidance to help you advance in your professional life. With this objective in mind, they also offer you resume preparation, placement assistance, internship opportunities, job update workshops, and special classes on Financial Modeling and career-related advice and services as well.
Who can pursue this course?
Financial modeling courses are designed for anyone with a proclivity in finance, tax, corporate structure, and activities. A financial modeling course helps to iron out any ambivalence regarding financial terms and concepts.
If you enroll in a financial modeling course, it will open up a whole new world to you about the finance sector. Concepts that might have felt esoteric will be easy to grasp and you will get a great many opportunities to flourish and excel in your careers.
Below is a list of professionals who can take up the financial modeling course to create a rewarding career in the finance domain as a financial modeling expert
Graduates and postgraduates in the field of finance, taxation, statistics, mathematics, and accountancy have a lot of potential in this highly rewarding field provided they take up these financial modeling courses with the mindset to evolve in this highly dynamic career avenue.
Since financial modeling deals with numbers and statistics, it is one of the finest careers for people with an inclination toward numbers and mathematics. You do not have to be a graduate to be eligible to enroll in the course. You might be in your first or second year of college and want to pursue a financial modeling career in the future. In such a scenario also, you can take up the course and master skills which will be an added advantage when you graduate and apply for financial job profiles.
Chartered accountants, cost accountants, and company secretaries can flourish as financial modeling experts after the completion of a financial modeling course. The financial modeling course enables you to tap into your potential as a financial modeler. With intensive training in accounts and finance, you strengthen your skills further and are able to leverage the benefits of the varied job profiles in the financial modeling domain.
People who are already in the finance field working in the business world in prestigious job designations can further their chances of getting even more lucrative job opportunities by enrolling in a financial modeling course. This provides you with extensive training on the different concepts of financial modeling.
You also learn how to use advanced Excel which comes to tremendous advantage when you are creating financial documents for business organizations. Finance professionals are already armed with great strategic thinking, and sharp minds, and have a knack for planning and analysis. Hence this will only help in their endeavor to become even more successful in the finance domain.
Tax professionals who have a strong knowledge of the tax structure in corporate organizations can have an added skill after completion of a financial modeling course. This will help you to expand your horizons and enable you to create more job opportunities for yourself by applying for different finance job designations that require the services of financial modeling experts.
The best thing about a financial modeling course is that it is not restricted to a certain academic or professional background. Hence engineers, architects, and people coming from technical backgrounds can very well enroll themselves in this course and fortify their skillsets to enrich their knowledge pool in finance. Furthermore, this knowledge comes to great benefit when you apply for job interviews with handsome remunerations and perks.
People pursuing Masters in Business administration are some of the sharpest minds with excellent strategic thinking abilities to handle crises and provide clear concise solutions to challenges. A financial modeling expert also has a similar job to do. Hence Business administration graduates and students have great prospects in financial modeling and can flourish within a very short period of time after they take financial modeling courses and start their jobs in the finance sector in financial modeling job positions.
Anyone Interested In Starting/ Switching Careers Irrespective of Educational background
Since financial modeling course eligibility is not confined to a particular educational background, people from humanities and science who want to start or switch careers can also leverage the benefits of a financial modeling course to apply for diverse career options.
Financial modeling can be an extremely interesting and rewarding career for people who have the fervor for learning and doing something that’s going to give them job satisfaction and provide them with a greatly lucrative option.
FAQs on Financial Modeling
What are the advantages of Financial Modeling?
Financial modeling helps to ascertain the value of the business and gives you an in-depth knowledge of the business assets and revenues. You get to periodically assess the situation of the business and review the performance of the decisions made. Moreover, it helps with risk elimination and minimization, deciding on fund strategy, budgeting, forecasting, and making judicious investment decisions. One of the most important features is, that it helps to determine the accurate free cash flow for the business to help them make strategic decisions regarding the future of the business.
What are the most coveted skills in financial modeling?
Since financial modeling is an extremely popular career choice today, few skills are absolutely mandatory for anyone who wants to become a financial modeling expert. The foremost skill is to have an exhaustive knowledge of advanced MS Excel. The importance of MS Excel cannot be emphasized enough. It helps with all aspects of creating a financial model whether it is determining cash flow, linking the 3 important financial documents, and providing an all-around understanding of the financials of the business. Other skills include understanding accounting, Finance concepts, and terms, being keen-witted, and having a proclivity to solve challenging issues. Add to it presentation skills, smooth communication skills, and the ability to convey complex information in simple formats, and you are on the road to becoming a prolific financial modeling expert.
What are some of the valuation methods in financial modeling?
THE valuation methods of financial modeling are precedent transactions, discounted cash flow analysis, and comparable company analysis. Though there are other valuation methods, these are regarded as the 3 most popular valuation methods in financial modeling and are used most frequently.
What are some of the best practices of financial modeling?
The best practices of financial modeling include having all the historical data in place, and understanding and researching the company ahead to understand its operations and mission. Other best practices include forecasting the cash flow estimates, integrating the three most important financial statements, keeping the model simple, and conveying the information in the easiest way possible. Last but not the least, it is compulsory to test the model for errors and overall accuracy and check periodically to evaluate the results of the assessments made.
What are some examples of financial modeling?
Examples of financial modeling are as follows
- Dcf Model
- 3 Statement Model
- Leveraged Buy-Out Model
- Initial Public Offering Model (IPO Model)
- Consolidation Model
- Budgeting And Forecasting Model (This Includes Linear Regression Model, Time-series Model, Straight Line, And Moving Average Model)
- Option Pricing Model
- Sum Of The Parts Model
- Assets And Liability Management
How to further improve a financial model?
The financial model will help to get a nearly accurate impression of the financial situation of the business by following a few key points to improve the financial model considerably.
These are as follows:
- Using the right font size
- Formatting properly
- Using titles for files
- Using shortened forms and explaining the difficult terms and jargon well.
- Well organized tabs
- The metrics of your financial model are simple and easy to understand.
What are some limitations with financial modeling?
As advantageous as it is to create financial models, there are a few limitations to financial modeling. First, there is a tremendous use of assumptions to predict the business. These assumptions about the future can sometimes lead to incorrect analysis. The success and smooth operations of a business are not just limited to internal factors but external factors as well and their food financial modeling cannot accurately predict how different laws and regulatory changes might affect the activities of the company in the future. Sometimes there are errors in Excel which might be overlooked. However, a lot of these issues can be mitigated by ensuring that the financial model is prepared by taking into account audited financial statements. This ensures the elimination of any major errors in the financial statements that might impact the financial model when it is prepared.
How To Start a financial model?
The starting point for the creation of any financial model is to thoroughly research the business activities and understand the business model well. Along with that, you have to collate historical data (this includes 3 years of financial statements that are audited and incorporated in an excel sheet). These two factors should constitute the starting point of your financial model to help provide an accurate projection of the business’ performance in the future.
What are the steps to create a financial model?
The steps to creating a financial model are as follows:
- Collecting historical data which includes calculating diverse Matrix and ratios
- Create the income statement, balance sheet, and cash flow statements with the data available.
- Integrating these three statements to create DCF analysis.
- After the DCF analysis, you can make assumptions about the various ways in which your business might perform that would reap positive results and result in increased growth and value.
What are the final steps to a financial model?
The final step of creating a financial model is to audit the model and start stress testing to determine whether the model is behaving as per your expectations. At the same time, you should start creating charts, graphs, and notes that are easy for every concerned party to understand. This helps glean all the important information comprehensively so that there is no ambiguity in communication. Images, graphs, charts, and designs lend ease to information retention and improve the efficacy of your financial model considerably.
This topic aims to provide you with a holistic understanding of everything that comprises financial modeling. You learned about the career scope, its functions, and industries that require financial modeling. Hopefully, it will help you make an informed decision on whether financial modeling is for you and how to bolster your skillsets through intensive financial modeling knowledge.