Freelance Financial Modeling – Concept, Types, Elements

November 25, 2023 Anuja Maniyala Financial Modeling, Knowledge

Believe it or not many companies prefer Freelance Financial Modeling compared to outsourcing their operations to established consultancies. One of the reasons for the same is the benefits the independent entities provide and lower costs. Let’s talk about it in detail but before that, let me share some knowledge on financial modeling and the related concepts in brief. If you are an individual with an intention to become a freelancer, the content provided here will give clarity on your choice of work profile.

Financial Modeling Concept

Financial modeling is a stepwise approach for the creation of a company’s summary in relation to its earnings and expenses in a spreadsheet format to estimate the impact of a potential decision or event. The financial models developed by the analysts post considering the company’s data are decision-making tools. They let the management choose strategies and plans to anticipate the success of a new project. The analysts view the models as a tool to find out the outcomes of a new project by changing the inputs. They consider external factors as inputs such as changed economic regulation.

Financial modeling is also used for the valuation of a company’s status in comparison to its competitors. The models are utilized to predict the results of the introduction of a new project considering estimated costs to prepare budgets and thereby allocate resources for attaining outcomes.

Purpose of Financial Modeling

Financial modeling is a tool for financial analysis and decision-making in a company. The internal as well as external members of the organization may be involved in implementing the concept. It is commonly used by firms to get an approximation of requirements for investments to raise capital, expand the business, remove or sell business units, budget, forecast, allocate capital, or evaluate its performance.

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Elements in a Financial Model

The developers of financial models must create a model with the inclusion of sections that have an income statement, drivers and assumptions, a cash flow statement, a balance sheet, valuation, supporting schedules, charts, graphs, and sensitivity analysis.

What Kind of Businesses Apply Financial Modeling Techniques?

Commercial and investment bankers make use of a financial model to handle activities related to equity research, sales, and trading, Public accountants view it as a due diligence and a valuation tool. Certain institutions take the help of financial models for the management of their portfolio, research, and private equity.

Types of Financial Models

There are a variety of models that deliver results as per the given inputs. The common kinds of financial models are the 3-statement model, Discounted cash flow (DCF), M&A, Initial public offering (IPO), and Option pricing model.

How is a Financial Model Validated?

A single mistake in the creation of a financial model can become expensive for a company. This is why most companies ensure to reach out to third parties for validation. This step is usually requested by project promoters, financial institutions, equity houses, and relevant corporations to reassure their clients that the model is defect-free and therefore the obtained results post input of assumptions and calculations are reliable.

Steps Involved in Financial Modeling

Just like the creation of any product, financial modeling involves a few steps to become useful for its end users. Here is the procedure of creating a financial model for the valuation of the financial performance of a company to let the management make informed decisions.

Step 1: Intake of historical data

Step 2: Analyzing historical performance

Step 3: Collection of assumptions for forecasting

Step 4: Forecasting financial statements by the usage of assumptions

Step 5: Assessing future business risk

Step 6: Performing sensitivity analysis

Step 7: Stress testing

Intake of Historical Data:

Past records of financial data are considered for the development of a model. An analyst usually considers 3-5 years old financial statements for the creation of a system. The analysts must be cautious while gathering and inputting the data as a single error in the development phase can deteriorate its quality.

Analyzing Historical Performance:

The analyst uses their knowledge of finance and accounting to evaluate the historical performance. They take up the charge to analyze every historical financial statement which usually is the balance sheet, cash flow statement, and income statement to make meaningful interpretations alongside identifying the trends.

This analysis is important and must be done with care as it will impact the considered assumptions for forecasting. The reason behind the identification of the trend is to understand the factors responsible for the creation of the existing pattern. For example, the employee has to figure out the reasons for declining profitability for the past three years or increasing revenue from the past 2 years. They may review various factors that contributed to such a trend so that they can change the inputs in a model and accordingly create a strategy for the successful running of the company.

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Collection of Assumptions for Forecasting:

The next step after analyzing the historical data is the creation of assumptions for the forecast. One way to build assumptions is by using the found trends from historical data to forecast future performance. For instance, an analyst can forecast the value of future revenue based on the past three years’ data. This approach is well suited for companies with performance consistency.

The other way to draw assumptions is by considering the current market scenario. This method applies to companies that operate in a cyclical industry or have limited historical data. The analyst must seek the assistance of the company for obtaining assumptions by asking for the items listed in the balance sheet including CAPEX and debt to create a sustainable model.

Forecasting Financial Statements by the Usage of Assumptions:

The building of assumptions must lead to the creation of a future balance sheet and income statement as per them. This step is then followed by interlinking the cash flow statement with the balance sheet and income statement to record the movements of cash in the forecasted period. The analyst must perform two checks after this, which are

The summation of shareholder’s equity and total liabilities should match with total assets’ value.
The cash balances in the balance sheet and cash flow statement must be the same.

Assessing Future Business Risk:

Once the output is obtained from the model, the analyst has to create a summary of it. The output is a product of the analyst’s formed assumptions and inputs given by the company. Next, the analyst must explain how the business can work in the future as per the developed financial model. For instance, the analyst can say that the company won’t face any difficulty in paying off its debt as they don’t see any real risks in the future.

Performing Sensitivity Analysis:

This step is to find out the time when the company’s performance will start decreasing and the percentage of drop. The analyst is obligated to integrate scenarios into the financial model for the performance of sensitivity analysis. In simple terms, it is a testing phase where the strength of a company’s resilience is identified using the built scenarios. This stage is important as it allows the analyst to record differences in the company’s performance in case of an unfortunate incident.

Stress Testing:

This is the last step in the financial modeling process. In this phase, the analyst uses his knowledge and expertise to build a worst-case assumption to test the company’s resilience. This stage is very critical as it sheds light on the behavior of a company at facing an adverse situation like a recession.

Why Opt for Freelance Financial Modeling Services?

Allowing independent professionals to evaluate your company’s performance by the creation of a financial model to make informed decisions is the best choice if you want to avail yourself of the below benefits.

Cost savings
Faster deliverables
Specialized talent
High-quality work
Risk reduction
Pool of talent
Short-term commitment
Easy recruitment process
Schedule flexibility

Cost Savings:

If you are a business owner, reaching out to freelancers for the implementation of financial modeling techniques is the perfect decision. This is being said so because conventional full-time employees need to be regularly paid. A freelancer, on the other hand, requests for a one-time payment. Also, if you keenly look at things from an organization’s perspective, recruiting a candidate, training them, and paying them salaries that include related benefits is a costly affair. A freelancer won’t ask for a separate workstation for the completion of work. They are experts in the industry and require less assistance except for the creation and testing of assumptions to validate the financial model.

Faster Deliverables:

If you have a bunch of staff members working for your company, you know that they have multiple projects to complete. But a freelancer’s whole focus is on your project meaning they will deliver the work within a short period. That being said, they do not compromise on the quality and accuracy of the delivered service.

Specialized Talent:

The main reason why a person becomes a freelancer is that they are experts at what they do. This also means they devote their time to regularly upskilling themselves. Traditional full-time employees may have limited expertise and knowledge as they have to deal with other assigned tasks. They may not know the in and out of financial modeling concepts, unlike a freelancer.

High-quality Work:

As mentioned earlier, freelancers are subject matter experts. Their only goal is to polish their existing skills and provide the best service to their clients. Most of them are highly talented. You can check their past works on their portfolios and decide if they fit the role you are looking for. Many of them avail of certification programs to add value to their profile. You can be assured that your company will receive the appropriate financial models as they are keen on enhancing their client list through their dedication.

Risk Reduction:

It is a fact that a company must invest in a hired candidate’s future through various programs. It doesn’t matter how many training sessions you provide to the employees if they have decided to leave you for another company. This means your investment is at risk. A contract with a freelancer for financial modeling services eliminates the risk as there is no obligation for you to continue the relationship after completion of the project. You get what you paid for. The contract serves as evidence to use against them if they abruptly ghost you.

Pool of Talent:

Sometimes companies settle for less. They hire people who are less eligible for the post due to the limited availability of human resources. Many independent contributors are prevalent in the world. They have a range of qualifications, skills, and talents depending on their area of interest. This means companies can sign agreements with individuals with the required skill set.

Short-term Commitment:

This is no brainer; a full-time employee depends on your company to earn their bread and butter. They join your organization expecting job security. But a freelancer accepts that your relationship is short term and allocates their time as required for the project. This indicates that you have flexibility in hiring independent contributors compared to dealing with full-time employees.

Easy Recruitment Process:

Believe it or not, there are several experts ready to Freelance Financial Modeling services. All you have to do is visit reliable online websites with freelancers’ profiles. You don’t have to bother your HR team to scan hundreds of resumes to validate their worth and hire them for your company. Freelancers have portfolios that make your life easier, you can check out their work and hire or reject their CVs.

Schedule Flexibility:

A common candidate needs to go through a series of activities to serve you. But a freelancer is easier to find and can help you with last-minute emergencies. You can contact them anytime and enter the agreement asap to get your work done as quickly as possible. For example, if you receive an urgent project request on a Saturday night, you have to wait until Monday arrives so that your staff members can start working on it. It is not the same case with freelancers, they can jump in any time and resolve the issues for you.

Benefits of Taking Up Freelance Financial Modeling

If you have taken up a course in financial modeling and are certified to offer services on your own without having to associate yourself with companies as full-time employee, freelancing is the best option for you. If you don’t believe it, read the below advantages of Freelance Financial Modeling aids.

Flexibility
Baby steps
Freedom of choice
Strong money-making capacity
Opportunity to develop and grow

Flexibility:

The presence of full-time employees is essential every day. It means the working hours are fixed irrespective of the work progress. But a freelancer can work anytime and from anywhere. There is no obligation to attend the office daily. Sometimes, the individual contributor may also have to attend virtual meetings with the management of the company to gather inputs and feedback.

Baby Steps:

If you have the plan to shift career paths, you can begin by working as a freelancer alongside being a full-time employee until you gain the confidence to work independently. You can decide if the chosen career path is appropriate for you or not as per the response from your clients. If you find yourself struggling to get many clients, you can continue pursuing a full-time job and simultaneously polish your skills via courses or workshops to become an expert in financial modeling. In simple terms, you don’t have to sacrifice financial security to become a freelancer.

Your Choice:

Full-time employees have no choice but to work with their employer. But a freelancer can choose clients to work with. If they are occupied with many projects at once, they can always reject offers from new clients. This also sheds light on being picky; if you have received projects from 2 well-reputed organizations and 3 from startups, you can choose the established ones to work with and improve your portfolio. There is no pressure to work with people you are not interested in.

Strong Money-making Capacity:

A full-time employee may have to wait for a year or two to get hikes. But a freelancer can gradually increase their salary as they gain more experience in delivering projects. For example, if you are a content writer, your initial fee may be 1 rupee per word, but as time progresses and your portfolio improves, you can charge 5 rupees per word.

Opportunity to Develop and Grow:

As you progress as an independent worker, you can explore new areas alongside offering Freelance Financial Modeling services. If you are an expert in the creation of financial models for investment portfolios, you can check out financial modeling related to sales. This way you can add as many skills as possible and become a reputed and established freelancer. Your clients who have projects both in the investment and sales sectors may avail of your services instead of finding a new freelancer to create a financial model to assess their performance in regard to sales projects and get assistance on decision-making.

Conclusion on Freelance Financial Modeling :

Freelancing has become the new trend to offer high-quality service to corporations and individuals. Many Freelance Financial Modeling Services to earn their bread and butter alongside fulfilling their wish to become an established entity in the industry. Financial modeling is a concept where spreadsheets are used for the representation of the performance of a company to find out areas of improvement and implement appropriate strategies for yielding better financial results. It is also used as a valuation tool by companies. The introduction of this concept was done to facilitate informed decision-making for the management; to give a glimpse of the impact of chosen inputs in the financial model and make required amendments to encourage the company to move in a fruitful direction.

Income statements, drivers and assumptions, a cash flow statement, a balance sheet, valuation, supporting schedules, charts, graphs, and sensitivity analysis are the elements in sections of a financial model. The 3-statement model, Discounted cash flow (DCF), M&A, Initial public offering (IPO), and Option pricing model are the various kinds of models developed by analysts to help organizations make better decisions. The developed model is sent to third parties for validation as requested by project promoters, financial institutions, equity houses, and relevant corporations to instill faith in its end-users about the reliability of the outcomes produced by it.

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Creation and Implementation of Financial Modeling Involves the Below Seven Steps:

Step 1: Intake of historical data

Step 2: Analyzing historical performance

Step 3: Collection of assumptions for forecasting

Step 4: Forecasting financial statements by the usage of assumptions

Step 5: Assessing future business risk

Step 6: Performing sensitivity analysis

Step 7: Stress testing

Businesses must opt for freelance financial modeling services as they can enjoy cost savings, faster deliverables, specialized talent, high-quality work, risk reduction, a pool of talent, a short-term commitment, a simple recruitment process, and schedule flexibility.

On the other hand, individuals who freelance financial modeling services can experience benefits such as flexibility, baby steps to thrive, freedom of choice, strong money-making capacity, and opportunity to develop and grow.

Financial modeling is an important method for companies to evaluate their performance through building assumptions and forecasting outcomes to let management make the right decisions which is why availing of high-quality freelance financial modeling services is necessary. Finding the best freelancer for the same is important with the help of reliable recruiting members who can invest their time in researching profiles and signing a contract with reliable and skilled independent workers.

FAQs on Freelance Financial Modeling

Q. Why should a corporation avail of freelance financial modeling services?

Availing of services from a freelancer for any work come with many advantages such as cost savings, faster deliverables, specialized talent, high-quality work, risk reduction, a pool of talent, a short-term commitment, a simple recruitment process, and schedule flexibility.

Q. Should I become a freelancer to offer financial modeling services?

No, there is no compulsion that you need to become a freelancer to create financial models. You need the right skills and knowledge to deliver financial modeling services. That being said, you could earn more if you choose to independently provide financial modeling services.

Q. How do companies validate the developed financial model’s usability?

Many organizations reach out to a third party for review. However, some entities may have internal teams to do the same.

Author: Anuja Maniyala

Anuja Maniyala is a intern at IIM SKILLS. She worked as a creative content writer for AADOX and Quoteslyfe in the past. She has identified her passion for writing after working as a banker in some well-known companies like Wipro and HSBC. Her current target is to become an author of a unique and creative self-help book. Her enthusiasm and curiosity to learn about the human mind and behavior makes her different from the rest of the world.