In one of my previous articles, I explained what is financial modeling, types of financial models, users of financial models and basics of financial modeling.
Then, I also covered some financial modeling examples using Excel.
In this article, Building Financial Models: How to Build a Financial Model, my main focus is to cover the strategies of financial modeling.
Building financial models: 5 Strategies to help you
No matter where you work, be it private equity, mergers and acquisitions or even equity research, when it comes to the key to entry into a financial position, then it solely depends upon a financial model. In fact, if you own your business, then the importance of a financial model remains indispensable. This generally seems like a difficult task, especially for beginners. However, fact remains that if you manage to break things down, then you’ll realize that you should very well be able to build a great model on your own.
5 Strategies to help you build a financial model
Check out the following strategies that’d help you build a financial model easily -
1. Adjudge the purpose and audience:
The very first thing that you’re required to do is adjudge the purpose and audience of your financial model. Most models would of course come across as similar, but the presentation of various metrics would be different. This would essentially depend on the kind of audience you’ve got.
2. Set up an assumptions page:
The next thing that you’re required to do is set up an assumptions page in which the first one should lay out the complete set of assumptions that you’ve used for your model.
3. Set up profit and loss statements:
The next thing you’ve got to do is set up a profit and loss statement. Remember, whether you own your business or work for one, it’s extremely important that your audience determine how detailed your profit and loss statements are going to be. However, take care to include the major line items like say net income, revenue, etc. Now, the essential bit is that the forecasted numbers should be pulling from your assumptions page. In this manner, you’ll be able to show your audience the change in different metrics on the basis of assumptions.
4. Build up cash flow statements:
After that you should take care to build up on the cash flow statements. You should show specific details here like Beginning Cash Balance, Cash Flow from Financing, Cash Flow from Operations, Cash Flow from Investing, Ending Cash Balance, etc. Now, you should make sure of the fact that the Ending Cash Balance is linked to your balance sheet.
5. Put together your balance sheet:
This is a rather important thing to do and it should pull from your assumptions page obviously. You should make it a point to link your Balance Sheet with your Profit and Loss wherever it’s applicable.
Follow the 5 strategies discussed above and also make sure of the fact that everything ties and falls into place. Remember, you’re going to lose your credibility if your numbers don’t tie. It’d be good if you built checks in your model.
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