What if I told you that creating a financial model is like writing a story?
Some of you would go like- Wait, what?! No way, Avadhut. You have got to be kidding. Story writing is still accessible.
Well, I am serious.
Through this guide, I will help you answer a question that many finance aspirants like you, who are yearning to become commercial bankers, portfolio managers, investment bankers, or advancing your finance career ladder, have been asking:
“How to learn financial modeling on your own?”
The answer is to imitate the art of story writing and storytelling analytically.
Financial modeling should not come off as big, scary, and unattainable, as many put it.
As your finance buddy, I like breaking down things simply and digestibly. If you have taken the challenge of learning financial models independently, you have reached the right place.
Key Takeaways
Expect these key takeaways from this guide:
Step1. Start with the basics: Master advanced Excel skills and grasp fundamental financial modeling concepts.
This will also build financial models with a solid foundation for creating accurate and effective financial models.
Step2. Learn through real examples: Follow financial modeling experts on social media, mimic their examples, and dive into real-world case studies.
This hands-on approach will give you practical insights.
Step 3. Time to build your own model: Develop the ability to analyze a business scenario, choose the right financial model type, gather and organize relevant data, and construct a flexible and logical financial model.
Step 4. Be a storyteller: Acquire storytelling skills to present your financial models clearly and compellingly for financial analysis.
This will help take business decisions and make them easily understandable for stakeholders – an essential skill in the investment banking and finance world.
Step 5. Structured learning awaits: Enroll in a comprehensive online financial modeling course.
This will give you structured knowledge, practical experience, and exposure to relevant industry case studies.
Step 6. Continuously improve: Embrace imperfections in your initial attempts. Seek constructive feedback and build a supportive network.
This way, you will continually enhance your financial modeling skills over time.
How to Learn Financial Modeling? 6-Step Action
A financial model, created using Microsoft Excel, is essentially a spreadsheet that predicts a business’s financial performance and future events.
Financial modeling finds applications in investment banking, equity research, accounting, and various other professions within the finance sector.
Financial analysts employ it to anticipate the potential impact of future decisions on stock prices and cash flows.
Here are the important 6-step Action plan for learning financial modeling independently:
Step 1. Start with ABCs and the grammar of financial modeling
The ingredients that go into a story are alphabets, words, sentence formations, and impeccable grammar.
The same goes for the financial models.
Lay your foundation strong.
To be able to quickly draft a financial model, you will need to sharpen your knowledge of these tools.
Best if these tools come with fluency, just as with a language and its grammar.
1.1. Become an Excel expert
Being familiar with Excel or Google Sheets is not enough.
You need to know the ins and outs, have simple to complex formulas at your fingertips, and be meticulous.
Expect the application of this software everywhere.
1.2 Learn about fundamental financial modeling concepts
Knowledge of the fundamental financial models and understanding financial statements, accounting principles, and financial metrics is paramount.
Acquire understanding of financial statements such as the income statement, balance sheet, and cash flow statement.
Explore the process of constructing the income statement in a financial model and apply the techniques showcased in practical exercises.
1.3 Get creative. Learn to work around compelling visuals and speaking for presentation
Get comfortable with graphs, designs, and utilizing your communication skills.
1.4 Learn to minimize mistakes; attention to detail is a must-have skill
A small, minor calculation mistake can turn the whole model upside down.
Hence immense focus on the finer details is required.
Step 2. Binge-watch on examples-Copy and learn
Love scrolling on the phone?
I have a learning trick that will make use of this habit.
Create a new social media account, and for the first two days, type keywords like ‘financial models’ and ‘financial model case studies’ and follow a few of the experts.
The AI will do the rest, working in your favor- suggesting similar content when you intuitively open the app.
This habit switch works best on LinkedIn.
You can begin by copying their examples for the sake of learning financial modeling.
Imitating someone else’s financial model can give you unique insights, help you analyze possible shortcomings, and build confidence.
Step 3. Draft your first financial model story
Once you ace the basics, start drafting the plots for your first financial model story. As much as we like, staring at examples is not enough; we must learn to analyze things independently.
Take hold of a pen, paper, timer, and a computer.
Search for a case study online and attempt your first financial modeling.
I am sharing a short synopsis of the steps involved in creating a financial model:
3.1 Ask, ‘What do I want to find from this financial model?’
Since analysis is a big part of the whole process, it’s always good to begin asking,
- ‘What is the purpose of this financial model?’ or
- ‘What kind of financial model should I use for this industry or case?’
Based on this and risk factors, choose the best financial model concept or model type that suits the business.
To name a few financial models that you could be working on are:
- Merger and acquisition model (M&A)
- Discounted cash flow model (DCF)
- Comparative company analysis model
- Corporate financial model
- Initial public offering model (IPO)
3.2 Gather the data for your plot and organize them
Start by plucking data and putting them in your basket.
It is similar to gathering knowledge on the real-life data of astronauts to create a sci-fi story.
In our case, it will be historical financial data, competitor data, or any other data relevant to your chosen financial model analysis.
Make sure you are sourcing them with accuracy and from a reliable source.
3.3 Identify the key characters of your story, known as the fundamental assumptions
It is some detective work, and analytical imagination is the key here.
- Which key characters run the story?
- What could be the fundamental values that can drive the business’s financial model?
It could be revenue growth rates, tax rates, etc.
Arrange them in a spreadsheet.
3.4 Develop the plot and combine all to construct the financial model
It is time to plug in the data and the key assumptions.
Use your selected financial model concept as a script to position them.
Here Excel sheet and its formulas work as sentences and paragraphs that shape your model. ‘
- ‘What’s the purpose of this financial model?’ or
- ‘What kind of financial model should I use for this industry or case?’
As you do this, pay heed to the cash flow statement of the model.
Ensure that each element is logically connected and makes analytical sense.
3.5 Make it flexible for changes, and conclude the story with a memorable presentation
Financial models are like plots; in this case, our story plots should be resilient and flexible enough to incorporate different characters (key assumptions).
This freedom to replace key assumptions allows us to calculate different outcomes of a dynamic business (similar to reality).
Hence, it helps us forecast multiple outcomes a business might face when it reduces or increases the value or entirely changes a critical assumption.
This flexible nature of a financial model is termed sensitivity analysis.
Once you have crafted and tested your story, document and present it to the stakeholders, or if this is your first draft, imagine showing it to them in front of the mirror.
Want to learn more in detail?
Read my How to Build Financial Models | A Complete Guide blog.
Step 4. Explain financial models through storytelling- Learn good storytelling skills
Storytelling can either make or break the analysis.
Like most analysts, I initially found myself struggling with communicating my data to the stakeholders.
No matter how good your business analysis and calculations are, none matters if you don’t know how to present them.
Both visually and verbally.
Successful financial models are often the ones that your stakeholders can easily understand, where you tell the data as if you are narrating a story that could have different conclusive outcomes or solutions.
Ultimately helping the decision-makers assess each ending and decide the one they want to go ahead with.
The easier it is for them to understand, to change certain factors (key assumptions) and asses the model, the more efficient your model is.
Signing up for communication classes is a plus (yes! You must drop your public-speaking fear).
Step 5. The structure provides clarity- Sign up for an online financial modeling course!
Yes, the internet is great!
It can considerably supplement your learning. And there are plenty of free examples strewn over.
But, erm…truth be told, there are not many good examples or much in-depth analysis.
Most free financial modeling material or case studies ignore the dynamic nature of a real business and often do not even account for real-world data.
What can be learned in finite months takes forever to learn (which is often the case due to the lack of structure, discipline, and information).
This was the initial case for many of my students before taking a formal online financial modeling course.
As their financial mentor, I combed through several online courses and stumbled upon the Financial Modeling Mastery by BIWS.
Step 6. Improvise- Rely on constructive reviews
You need to promise me—you will not give up soon.
Your first financial modeling attempts will probably be messy, confusing, and imperfect.
That is how most learning experience starts right?
Many rough drafts are written and edited before publishing an article or a book.
The same goes for the financial models.
Being your constructive critic could be a good practice, but it is not always helpful.
We are humans, after all.
Rely on a friend who is learning the same, or even better, get in touch with a finance mentor who helps increase your chances of leveling up, prevent common mistakes, and guide you to perform better.
Frequently Asked Questions
Got more questions? These might help you:
Why did I specifically cite an example of a storyteller?
I have encountered many finance professionals who are good at numbers but fail miserably in presenting or convincing decision-makers because of their poor representation of data and inability to communicate it vocally and through their reports.
It is because we tend to see the financial model as a big complex thing instead of realizing that it is nothing but a story about a business.
Hence, the storytelling concept.
1. Which financial model case studies should you practice?
‘Which one is the best, Avadhut?’ is a question my students keep coming to me with.
My advice: Opt for case studies that let you deal with practical business scenarios.
Practicing different financial and quantitative models can give you layers of insights into various industries.
Harness this first, and then start specializing in your niche.
2. How long will it take you to learn financial modeling?
You are in for some good news!
On average, a person may take only ‘months’ to acquire the knowledge of financial modeling.
However, the number of months will differ considerably for each individual, given the skills you have already acquired. I have covered much about it in detail in the ‘How long will it take for you to learn financial modeling?’ article.
3. Are online financial modeling courses practical?
My answer dangles between ‘Yes’ and a ‘No’.
- No, because the internet has plenty of online financial modeling courses but often misses out on the core aspects: accounting practical situations, focusing only on the analytical aspect, lack of community that helps in your growth, and missing out on relevant industry case studies.
- Yes, because I found a course that encompasses it all. The BIWS Certification course is an all-rounder in this aspect. It is a great deal! The course is designed to fully prepare you for the industry (I have covered a thorough research on it. Read here for more clarity).
My Exclusive Insights for You
Having read my action-oriented guide on financial modeling, you may have figured that learning one is not just about harnessing analytical skills and is not a lone journey.
No learning ever is!
To sharpen your skills and get in-depth examples and feedback, you need a network, your community, and your supporters by your side.
I do a mini victory dance whenever I know my guides are helping you out.
If you need guidance for your financial journey, feel free to comment.
