What Are Financial Modeling Skills You Must Have?
Have you ever wondered how organizations, large and small, examine and forecast their future in order to take suitable actions and decisions? The answer is Financial Modeling which has a high demand in the business sector, not only for established businesses but also for startups and small businesses. It gives you a forecast of risks and benefits associated with implementing decisions or ideas. Let’s get a basic understanding of financial modeling before we know about what are Financial Modeling skills? And the skills required to make a dependable financial model for a business.
What is Financial Modeling?
The financial model shows the prediction of the future financial performance of a company. The process of creating a summary of a company’s expenses and earnings in the form of a spreadsheet can be used to calculate the impact of future events or decisions. It’s a way of combining accounting, finance, and business metrics to build a representation of a company that can forecast the future for the business.
The most common use of a financial model is for making business decisions such as investment decisions in a public or private company. Another use is for pricing Securities if a company is going to raise money, that is to issue shares or issue debt. They need a financial model to value those securities. It’s also used for undergoing corporate transactions such as a merger, acquisition, or divestiture.
Who uses financial models?
- Financial modeling is required in the following professions and careers, but it is not restricted to these.
- Analysts & Associates in Investment banking who deal with mergers, acquisitions, and capital raising consistently use financial models.
- Analysts & Associates in Equity research who make recommendations about companies to invest in, and use financial models for analyzing and predicting the future scenarios.
- Professionals in private equity build financial models to decide which companies the private equity firm wants to acquire and how much they should pay.
- Credit Analysts need financial models to figure out how much money they can lend to a business
- Professionals in Financial Planning and Analysis (FP&A) build financial models to forecast and plan an operating company.
- Managers and professionals in corporate development use financial models to access mergers and acquisitions.
- Business owners and entrepreneurs might require financial models to help them make well-calculated decisions that would impact the future performance of a company.
- Any individual who is willing to know what are financial modeling skills and implement them.
- Real estate developers can also use financial models to determine the profitability of a project to invest in.
- It can also be used by individuals for managing their personal finances.
- Governments constantly use financial models to access, analyze and predict future financial performance.
- Universities also use the financial model concepts.
Read Here Is Financial Modeling a Good Career
What are Finance Modeling skills?
Now that we know briefly about Finance areas and professions that use it, let’s try to know, what are finance modeling skills required to ace yourself in this field. Skills required can be broadly divided into three main categories.
- Accounting and Finance Skills.
- Advanced Excel skills
- Skills related to Problem Solving, Logic, and Creativity
1. Accounting and Finance Skills
Accounting and Finance skills are the first and foremost skills when knowing what are financial modeling skills. Although anyone who is interested can pursue this career, However, it is best suitable for Students from the Accounting / Finance academic background, aspiring MBA graduates, and working professionals. Let’s look at some of the skills which are mandatory.
Reading Financial Statements
To analyze a company’s financial prospect—whether it’s your own, your employer, or a potential investment—the best way is through its financial statements. These statements have a lot of information about its budget, business strategy, product development, and decision-making.
So, one should be able to understand what the numbers are telling about the company. There are many types of financial statements you should familiarize yourself with when comprehending important skills. the most important types are:
- Balance Sheets: These records tally all of an organization’s assets, liabilities, and equity and provide information about its “book” value.
- Income Statements: commonly known as profit and loss statements or P&Ls show how much money a company generated and spent within a specific reporting period.
- Cash Flow Statements: financial statements that show a company’s cash flow from operations, investments, and financing.
- Annual reports explain a company’s economic operations for the previous year while also conveying its progress toward initiatives and goals through numbers.
Charm the prospective employers with financial modelling skills to hire you for finance-related jobs with our Complete Financial Modeling Course.
To make the most out of financial statements, you need to analyze them. The information obtained after a thorough analysis can be used to calculate key ratios or other financial metrics, such as gross and net profit margin, working capital, debt-to-equity ratio, and inventory turnover, which offers a detailed insight into a company’s finances.
Generating Financial Statements
Financial statements are created by members of the accounting department and the executive suite in most organizations. However, entrepreneurs and anyone working in a startup environment may be responsible for drafting financial statements. So anyone engaged in entrepreneurship or management should have a good understanding of what information goes into each financial statement, how to analyze it, and what exactly it means.
The practice of estimating a company’s future income, cash flow, and expenses is known as financial forecasting. Businesses use forecasts to budget and plan for the future, as well as to present information to investors in financial reports.
Making a forecasting miscalculation or neglecting to account for risk can severely limit a company’s ability to operate. As a result, knowing how to forecast financial statements and properly anticipate revenue and cash flow is a critical business skill.
Calculating Return on Investment (ROI)
Another important financial skill that most business professionals might benefit from is calculating return on investment, or ROI. In business, return on investment (ROI) can relate to a specific project, such as a product launch, or it can refer to an organization’s total activity. A few important terms to remember are:
- Return on invested capital (ROIC) is a metric that determines how effectively a company allocates capital to profitable projects.
- Net present value (NPV) is a calculation that determines the value of future cash flows from a project or effort in today’s currency.
- Internal rate of return (IRR): This statistic is used to determine the profitability of a possible investment for a company.
Developing a Data-Driven Mentality
When reading or preparing financial documents, calculating return on investment, or forecasting the future, you must engage with vast amounts of data. You must first comprehend, assess, and synthesize such data before you can apply it. The data can then be used to inform critical business choices and initiatives.
The Finance Language
When learning what are financial modeling skills the language of finance is a key communicating factor for any business professional. You may improve your communication with people in your business, your supervisor and team, members of the executive team, and other key stakeholders, by understanding how to talk about finance and money.
This will enable you to connect your efforts to the value you bring to the organization and will aid in the formation of important working relationships. If you work in management or regularly interact with the financial team, you’re undoubtedly already familiar with the fundamentals of finance. Improving your financial terminology and analytics skills can help you become more productive in this situation.
communicating in financial language when discussing what are financial modeling skills will widen your scope of learning, if you have no past financial experience, improving this skill will have a significant impact because it will open up various new lines of communication both inside and outside your firm.
Developing your Financial and Accounting skills
Now that you know what are financial modeling skills related to Finance and Accounting, you may be asking how to improve your skills. If you prefer to learn on your own, there is a lot of information available online to help you develop your financial foundation. You can use search engines to find what are financial modeling skills or start with articles, videos, and books from reputable sources.
You can also practice your abilities by looking at the financial accounts of most public companies, which are published quarterly. If you prefer a more structured learning environment, you can enroll in online courses or traditional courses, workshops, or boot camps. You can seek a mentor in a similar field who can tell you what are financial modelling skills in real-time situations.
A more structured approach may be beneficial if you’re a newly appointed manager who wants to refresh your financial knowledge, an entrepreneur getting ready to launch your business, a recent college graduate, a working professional considering an MBA, or someone who simply wants to develop their skills quickly.
Developing analytical skills can help you in a variety of other areas of your work. The skills you acquire when knowing about what are financial modeling skills can also be utilized in personal aspects of life.
If you work in management and are thinking about changing jobs, studying publicly available financial statements can help you assess the company’s health and determine whether it’s a viable career move. If you decide to continue with your present employer, being able to focus on critical indicators and suggest strategies to enhance them might help you make a positive impression on the executive team.
Here is an insight into Financial Modeling Salary
2. Advanced Spreadsheet Skills ( MS-Excel)
Mastering formulae, VBA (Visual Basic for Applications) programming, and other Excel tools for managing difficult jobs are all part of advanced Excel skills. Excel can be used for more complicated tasks such as data analytics and simulation by experts. The following are some useful advanced skills. Let’s see what are the financial modeling skills, related to Excel used by many professionals.
VLOOKUP (vertical lookup) is a table lookup function that retrieves data from a given column. Essentially, it uses a lookup value to extract data from a table vertically. VLOOKUP is a useful ability to have because it allows you to combine many sets of data into one.
VLOOKUP is useful in the following situations:
- In a financial model with a debt schedule, calculate the corresponding interest rate flow.
- Looking up the number of units sold of a particular item
- Calculating bonuses for sales
An EXCEL formula that combines two functions: 1-Index and 2-Match. The former returns the value of a cell in a list or table at a specific place. The latter returns the row or column location of a cell. When these functions are coupled, a formula can become dynamic, as in a two-way lookup.
Its applications are similar to VLOOKUP, but INDEX MATCH is more versatile. For example, it can be used to return sales figures for a certain month for a specific agent, create a financial summary, and make a purchase order with a price list
Advanced Conditional Formatting
Conditional formatting is an excellent technique to build a spreadsheet because it allows a user to add a visual analysis layer to a data collection quickly. Advanced tools like heat maps and Harvey bubbles can also be created with it. A heat map is a visual representation of data that uses colors to highlight which values are larger or smaller than others, commonly on a warm-to-cool color range.
Harvey balls are graphical representations of qualitative data that show how closely an item satisfies a set of criteria. Advanced conditional formatting can flag data entry problems, show duplicates, highlight rows that have the most sales
Pivot Tables and Reporting
A pivot table is a useful Excel feature for creating reports with vast amounts of data. In some ways, a pivot table is similar to a regular report table, with the exception that you can view the same data from various angles. A user can utilize pivot tables to divide data into categories, filter data to include/exclude groups, and even create charts.
In the real world, pivot tables can be used to construct:
- Database of employees
- Database of products
- Record of project sales
Macros and VBA
A macro is a short computer program that, once activated, performs one or more operations. Macros are created with the VBA (Visual Basic for Applications) programming language, which is saved in modules. Using a macro necessitates a thorough knowledge of VBA. VBA macros are useful for automating processes. However, not every Excel user has this expertise due to its intricacy.
VBA Macro is used by advanced Excel users to:
- Quickly clean up and format data
- Data on all sheets are listed.
- Automate pivot table properties and actions
- User forms can be created and modified.
- Developing processes for creating, updating, and changing Excel files
Making a mathematical model to describe the properties of a system is usually the first step in a simulation. While there are specialist simulation software applications available today, someone with advanced skills can utilize Excel to simulate.
To perform a simulation in Excel, the user must be familiar with features such as:
- Functions for generating random numbers
- Functions of statistics
- Tables of data
- Tools for what-if scenarios
Let’s move on to the third group of skillsets, Soft-skills and Presentation, now that you’ve grasped the technical parts.
Also Read: Financial Modeling World Cup
3. Soft Skills
Personal traits which are essential for communicating and working with others in a group environment or individual situations are considered soft skills. These abilities make it easier to forge interpersonal relationships, build trust and reliability, and lead teams. They are, vital for your professional success, as well as your company’s and personal success.
When discussing the topic of what are financial modeling skills, soft skills are integral aspects. You might be negotiating a new contract, presenting your fresh concept to coworkers, networking for a new position, and so on at work. Every day at work, we use soft skills, and refining them will help you earn more money and grow faster in your career.
Soft skills like communication are employed outside of the office to form friendship groups and meet possible spouses. You may be negotiating the cost of your new home makeover or spending the weekend teaching the children of your neighbors. Both our professional and personal life benefit from soft skills.
Logical Thinking skills
Logical thinking skills are a set of abilities that allow you to solve problems logically. They enable you to give well-thought-out responses to any problems that arise. They also provide you the ability to make decisions that the majority of people would deem logical.
If you have taken a logical approach to know the important skills, you have already taken your first step toward implementing logical thinking. You can analyze and evaluate a problem before making a decision if you are a critical thinker. To become a logical thinker, you must enhance your critical thinking skills and logical abilities.
If you’re a skilled researcher, you’ll be able to look for and uncover data that can help you deliver information about your chosen topic. The more relevant information you have on a topic, the more accurate your judgments will be. You must choose reliable and relevant sources.
As a result, your ability to gather knowledge will influence your ability to think logically. For example, when you are researching what are financial modeling skills if you have cultivated research abilities you would be on the path of your desire.
Creative Thinking Skills
If you think creatively, you can come up with novel answers to difficulties. When it comes to brainstorming ideas and prospective solutions, you are the type of person who can think beyond the box. Your thought process is fluid. Instead, you have a tendency to consider situations in ways that others have not.
While logical thinking is founded on data and facts, it is inflexible. Creative thinking is never limited to knowing, what are financial modeling skills. It can be applied to diversified situations. You can be resourceful in your data collection or experimentation to arrive at reasonable conclusions. Your strategic thinking abilities will also aid you in analyzing reactions and gathering feedback.
If you’re good at math, you’ll be able to work with numbers and portray mathematical concepts with visual symbols. Your brain must be able to process data. Business is all about numbers. This implies that you must be proficient in mathematics. You must be capable of performing simple mathematical calculations.
You must be comfortable working with numbers in order to become a logical thinker. Many business-related difficult problems will contain them. And your capacity to comprehend them will influence whether you can arrive at a correct logical conclusion that benefits your company.
Your reading abilities will indicate how competent you are at logical thinking and reasoning. And you’ll need that skill set when you’re faced with a variety of work-related assertions from which you must draw conclusions. Such remarks could be included in your company’s policy, technical manual, or other documents. The more you read the more you will understand the skills required.
Active Listening Skills
If you are an active listener, you will be able to hear, understand, recall, and respond to what is being said. Not every instruction is written down. You may need to listen to someone before writing down, the knowledge you need to solve problems, in that situation, your ability to remember the conversation and apply it to figure things out logically will be determined by your active listening skills.
Information Ordering Skills
Ability to arrange things based on a specified order following the set rules or conditions. Different organizations have different business processes. No organization has the same workflow as others even if both belong to the same industry. And it will have a major impact on how you can think and reason concerning solutions to your company’s problems.
So, it’s necessary to follow the standard operating procedure of the company in the right order because skipping or alternating the right order of procedures to be followed will result in unforeseen situations leading to unexpecting consequences. Though your intentions are good the results may not be favorable for you or your organization.
Check out here the best Financial Modeling Courses in India
4. Presentation Skills
It would not be justifiable if we don’t include Presentation skills when trying to get a complete understanding of what are financial modeling skills. The six elements that are important for good presentation are legibility, expressiveness, visual hierarchy, consistency, Uniqueness, and intentionality.
It is important that everything in your presentation is legible. If something is difficult for people to read or understand, then your presentations are not as effective as they should be.
Making the presentation is such a way that people understand the story behind the numbers and statistics by doing that the message and the intention of the message in the presentation are clearly communicated.
The order in which people view your presentation is super important for a good presentation. This is especially true in designing flow charts and pie diagrams because creating a flow for users to navigate on these platforms is the primary objective. If hierarchy is poorly executed, the message you intended to communicate through the presentation may not be sent correctly as it would not be understood easily
Consistency is the key principle of a good presentation. If consistency is missing in a presentation the concepts and the underlying message are difficult to follow and understand which goes against the main purpose of creating the presentation.
Make sure every presentation is unique in its own way, by doing this your credibility and reputation will also be unique
Every design choice must be intentional which means you have thought about every choice and observed the final outcome of your design multiple times before finalizing it. Choosing a font, a color, and the placement of something must all be well thought out. Having intentionality in your presentations shows people that you really know what you are doing and how to accurately convey your messages.
FAQs Related to Financial Modeling.
Q1. What is the future if I learn financial modeling?
Finance is one of the rapidly growing and evergreen sectors, each and every role in a finance department requires skills. So, acquiring the skills gives you an edge over others and makes you future-ready.
Q2. Can I learn financial modeling through self-learning?
Financial Modeling skills are the combination of Hard skills and Soft Skills. If you want general information, you can learn it through online sources by yourself, however, if you are serious about your career, it would be wise to take up an online course so that you can move on from asking about what are financial modeling skills towards a dynamic career ahead.
Q3. What are the best financial modeling courses which I can do online?
Some of the best financial modeling courses available online are:
- Course by IIM Skills
- FMVA certification by CFI
- Financial Modeling and Valuations Course by The Wall Street School
The journey of knowing, what are financial modeling skills is a comprehensive and never exhaustive one. In any career, as you get to experience more real-time scenarios, your proficiency and skills do increase now. You would be able to make a well-informed and logical decision about a career that adds meaning to your life.