What Is Financial Modeling

 

“What is financial modeling?”

“Do you teach financial modeling?”

“Can you give me a sample financial model that I can fill with numbers and present in the interview?”

“How to build a financial model?”

“Do you cover macros while building financial models?”

I’m constantly bombarded with such questions on financial modeling. And, the funny thing is—when I ask the person,”what is financial modeling?”, that person doesn’t have any clue.

So, I thought it’s apt to write on this subject today.

 

1x1.trans What Is Financial Modeling

What is financial modeling

As per Invesopedia,

The process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security. The model is usually characterized by performing calculations, and makes recommendations based on that information. The model may also summarize particular events for the end user and provide direction regarding possible actions or alternatives.

As per my experience,”financial modeling” involves building financial models, sometimes from scratch or sometimes maintaining and updating the existing financial models. Financial modeling is a skill and you can learn it through lessons and practice.

What is a financial model?

According to Moneyterms,

A financial model is anything that is used to calculate, forecast or estimate financial numbers. Models can therefore range from simple formulae to complex computer programs that may take hours to run.

In short, financial models are mathematical models in which variables are linked together.

For sophisticated models such as Discounted Cash Flow (DCF) model, you need to use computer.

Microsoft Excel skills are must to build or update financial models.

There are computer programs built for high-end and complex financial models such as—Value-at-Risk(VAR) models used in risk management.

Where can you use financial models

Financial models are used in:

 

Users of Financial Models

There are four main groups of users that use financial models.

  1. Business owners and entrepreneurs
  2. Finance and Accounting professionals
  3. Financial Modelers and Consultants
  4. Individuals for personal finance

Let’s see the areas where you, as a financial analyst, can use financial modeling skills.

  • Forecasting future raw material needs
  • Valuation of a security
  • Benefits of a merger
  • Check the size of the market opportunity
  • See the roadmap to profitability
  • Check investment requirement
  • Quantify and predict risk
  • Portfolio performance
  • Identify undervalued securities

The question comes to mind that only one financial model is useful or we need to use different types of financial models.

Types of financial models

There are different financial models that you can use as per the need.

  • Discounted Cash Flow model
  • Comparative Company Analysis model
  • Sum-of-the-parts model
  • Leveraged Buy Out (LBO) model
  • Merger & Acquisition (M&A) model
  • Industry-specific financial model
  • Option pricing model
  • Corporate finance models

These financial models are used to solve different problems.

As a financial analyst you should know the time and type to use a  financial model.

To gain expertise in financial modeling, you should know the financial modeling basics.

Financial modeling basics

 

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Learn Financial Modeling

Are you preparing for financial modeling jobs? Then only downloading financial modeling templates won’t help. This will help:

  1. You should be good in Accounting, Finance and Valuation and financial modeling Excel skills.
  2. Ask yourself, “What problem I’m going to solve by creating this financial model?”
  3. You should know the scope, benefits and limitations of financial modeling.
  4. Remember: Garbage in garbage out principle. So, check your inputs.
  5. Your model should be simple, easy to understand and flexible enough to accommodate future revisions.
  6. Time management is a key aspect in financial modeling. Don’t get overwhelmed by numbers and calculation part in spreadsheets.
  7. Lastly, you should be able to take a decision based on your financial model.

Download financial modeling sample videos

In short, financial modeling is a skill and you can develop this skill by learning Excel Financial Modeling Training, applying and practicing it well. Have queries? Speak Your Mind 1x1.trans What Is Financial Modeling

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38 Responses to “What Is Financial Modeling”

Read below or add a comment...

  1. varsha says:

    Hi sir
    this is varsha stuying mba…. Noq only i can go for finance modeling course or now its not required? And what all opportunities.i can get frm this course.

  2. devendra says:

    Hi,

    I am Devendra, I am very average in learning since school days ! but now want to enhance carrier as a financial analyst, even I am just graduate and working as an accountant, May this course good for me?

  3. Adi says:

    Hi,

    I am currently working as IT professional in one of MNC. Previously I had an experience of 4 years with IT . after that I took a break for almost 3 years due to some personal priorities but in the mean time during this gap I completed my MBA in Finance.
    Although after a long break I again joined in IT company because of my past experience in the same field.
    I also looked for the job in finance sector, but since I don’t have any prior experience in Finance , and also have never worked on financial modelling or any other tools which is used for the company analysis, so not able to apply for the finance sector.

    I want to join the finance sector . I have some basic knowledge or u can say theoretical knowledge on financial statements ,valuation methods etc but no pratical experience. Please advise me on this where to start with to gain knowledge on Financial modelling to make myself suitable enough to apply for the finance jobs.

    Thanks
    Adi

  4. mish says:

    hi
    i am an accountant graduate,I have also done CPAs and currently pursuing MBA in Finance.
    I have tried to seek for employment but i have not been lucky because i have no experience in the
    working environment.
    I have now volunteered to work in a certain company which is very young. If i proof to them that i am
    an asset to them they are likely to hire me.
    the other day i saw my boss doing some costing for a given co. using financial models.
    i developed an interest of learning the financial models. when i informed him he sent me some templates but
    they are very difficult for me to learn.

    what are the basics for financial modelling i am interested in historical analysis of a company and predicting the future perfomance of a company for both new and existing companies.

    i will appreciate your help.

    thank you.

  5. James says:

    I’m responsible for the financial analysis and accounting for a startup. I have acquired accounting knowledge from education and work experience. But I have no experience in the financial analysis field. I have only basic excel skills and am new to financial modeling. I am currently using a school course book for excel to self educate.

    Are all your financial modeling posts/topics on the website sufficient for what I need for a startup or is there something else you would recommend in addition?

    Thank you.

    • Hi James,

      As far as accounting and financial analysis goes, the posts here are informative and should be enough. But for skills purpose, I would suggest you to join BIWS ‘Excel and Financial Modeling Fundamentals’ program. Check the course name and details on this page.

  6. Afolarin Samuel says:

    I shall be going for interview as a financial controller on 30/9/14. Financial modelling and analysis are being stated as parts of my responsibilities. please, I don’t understand…..

  7. Mohit says:

    Hi

    I am a commerce graduate, keen to learn about financial modelling techniques,presently working in BPO sector..could you please advice?

  8. shobhit says:

    Already working as a derivative analyst is ur course available at weekends.

  9. aimal says:

    Dear Concerned,

    Greetings
    Aimal with you an ACCA and working currently as Financial Accountant.
    What will be the advantage of learning Financila Modeling for jobs securing ,

    Thanks
    Aimal Khan

  10. Moses Noti Kamaghe says:

    For sure this financial modeling is highly recommended

  11. Pramod Parab says:

    Hi Avdhut

    i need ur advice..m a commerce graduate..done M.com and Diploma in financial management from wellingkars…i have also completed charted financial analyst from ICFAI and MS Finance from the same institute..currently persuing MA Economics..m interested in Equity research profile but clueless because have no experience in core area..currently m not working.. please help..

    Regards

    Pramod Parab

  12. Hemant says:

    Hi Avadhut,

    This is a helpful article for me, I really appreciate you efforts :)

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