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Benefits of Financial Modeling
Benefits of Financial Modeling
Benefits of Financial Modeling
All information necessary for the model are stored in a file. In general, the creation of a model is divided
into four parts.
1. Store all necessary raw data in spreadsheets (for example, business reports)
3. Derive results of the Financial Models (for example, the generating cash flow statement).
Conclusion: Financial Models can be used to assess future earnings, assets and liquidity situation of a
company. So it should be constructed as detailed as necessary and not as easy as possible. Although
the financial modeling is anticipated assumptions, it provides a company a number of advantages. It has
outstanding insights for strategic decision.
7. Advantages of using financial models
From the previous few pages, it is easy to see that there are many reasons why
In your examination, if you are asked to identify the advantages of using financial
models, here are some of the reasons which you could give:
- What if...? statements can be asked without rebuilding a model from scratch
each time the test is executed.
- Models try and minimise financial risk, as you know 'if you do this' then 'this is
likely to happen'
- Models provide quick answers to things that may take months to actually
happen. Automatic recalculation means that if a change is made in the model
then all related formulae and values change.
- As long as the person is familiar with the model and has a good set of rules to
follow then it is easy to run the model.
- They provide consistent results - the same inputs will always produce the
same answer so a decision to 'make that loan' to a customer by a finance
employee does not depend on how that person is feeling that day.
Financial Modeling
Financial analysis Print Email
Meaning and definition of financial modeling
Financial modeling refers to the process through which a company builds up a financial
representation of some, or even all aspects of the company or the given security. The financial
model is generally featured by performing calculations, and making recommendations on the basis
of that information. Moreover, the model might also prcis specific events for the end user in addition
to providing direction regarding possible alternatives or actions.
As explained by Investopedia, financial models can be created in different ways including the use of
computer software and the use of a pen and a paper. For instance, a financial model can prcis
investment management returns or might help in estimating the market direction.
Accounting of financial modeling
In investment banking, corporate finance, and the accounting profession, financial modeling is
mainly synonymous with cash flow forecasting. This generally includes preparing detailed company
specific models which are used for the purpose of decision making and financial analysis. The
applications mainly include:
Business valuation, particularly discounted cash flow, but counting other valuation problems.
Management decision making and scenario planning (like what is, what if, what has to be
done, and similar more.
Cost of capital
Capital budgeting
Project finance
Financial statement analysis
Why is financial modeling important?
Financial modeling acts as a useful tool which enables business options and risks to be estimated in
a cost-effective way against various assumptions, recognize optimal solutions in estimating financial
returns and understand the effect of resource constraints thus leading to more effective business
decisions.
Financial modeling can be referred as an art and like any other art form, it requires constant [practice
and commitment to develop expertise in this area. In the present day world, many companies are
becoming globally integrated with the international economy through the way of
acquiring/establishing international operations. This calls for the requirement of strong financial
models which can assist in performing the evaluation of every countrys operations, reflect on
multiple currencies in their model, estimate varying capacity utilizations to estimate the optimal
capacity under changeable industry demand-supply scenarios and similar more cases.
Financial Modeling
Financial Modeling is a tool that can be used to forecast a picture of a security or a financial
instrument or a companys future financial performance based on the historical performance of
the entity. Financial Modeling includes preparing of detailed company specific models which are
then used for the purpose of decision making and performing financial analysis. It is nothing but
constructing a financial representation of some, or all, aspects of the firm or given security. OR
it is mathematical model of different aspects of financial health of a given company and this
model can be made on a simple not book paper or in excel, with later it is easily possible to
analyse the impact of different assumptions or change in value of various variables hence gives
the more flexibility. Financial modeling is a mirror which shows whether
Be relatively simple
Evaluate Risks
Financial Modeling forms a core of various other Finance areas like Equity Research,Investment
Banking, Credit Research etc. If you are searching for a Financial Modeling Online
Course/Training then you may consider one of our Financial Modeling courses here.
Project Finance
Industrial comparatives
In Financial Modeling it is desired that the working should be error less and should be easier to
read and understand for audit purposes. By following these key principles, model will be easier
to navigate and check, and reliable.
For most obvious results we need to follow the Firms standard format
Spreadsheet Design
Using modular spreadsheet blocks will make changing each sheet easier
without affecting others.
Labeling sheets, columns and rows with their applicable headings so that files
will become easy to follow.
Linking wherever required will be a good practice such that when the inputs
change, the outputs will be changed automatically
Its always better to link cell value rather than writing numeric value for
calculations.
Using formulas and functions will be accurate and will save time.
Do not copy formula from one sheet to another as it will create links in files.
Avoid unnecessary blank columns and rows as this can be tedious at the time
of making tables or other charts.
Creating a VBA Style Guide containing rules and details about coding
standards is good
Its very important to format cells appropriately i.e. we should follow standard
practices eg. we should use symbols for currency , percentages values etc. ,
which will make model easier for reading.
Try using different background colors for distinguishing input areas and
calculation parts
a) Financial Modeling Revenues Projections For most companies revenues are a fundamental
driver of economic performance. A well designed and logical revenue model reflecting
accurately the type and amounts of revenue flows is extremely important. There are as many
ways to design a revenue schedule as there are businesses. Some common types include:
1. Sales Growth: Sales growth assumption in each period defines the change
from the previous period. This is simple and commonly used method, but
offers no insights into the components or dynamics of growth.
3. Unit Volume, Change in Volume, Average Price and Change in Price: This
method is appropriate for businesses which have simple product mix; it
permits analysis of the impact of several key variables.
4. Dollar Market Size and Growth: Market Share and Change in Share Useful for
cases where information is available on market dynamics and where these
assumptions are likely to be fundamental to a decision. For Example: Telecom
industry
5. Unit Market Size and Growth: This is more detailed than the preceding case
and is useful when pricing in the market is a key variable. (For a company
with a price-discounting strategy, for example, or a best of breed premium
priced niche player) e.g. Luxury car market
11.Store, facility or Square footage based: Retail companies are often modeled
based on the basis of stores (old stores plus new stores in each year) and
revenue per store.
1. This is one of the few income statement items that is driven by balance sheet
information. A interest schedule is generally developed to i) calculate interest
received on cash and short term investments and ii) calculate interest
expenses arising from all types of debt. Interest rate assumptions are
needed.
3. Average balance can be used as well (it will give circular reference though)
1. Effective tax rate is generally used. Effective rate is calculated as Taxes paid /
Pre-Tax income.
2. For future years, either the marginal tax rate equivalent to the country of
incorporation is taken or if the effective rate is much lesser than the marginal
tax rate then during the initial years, tax rate can be low but gradually would
have to be moved to marginal tax rate. For example, In India, marginal
corporate tax rate is 33%.
o Modeled as % of sales
o Key feature of the debt schedule is to use the Revolver facility and how
it works so that the minimum cash balance is maintained and ensures
that the Cash account does not become negative in case the operating
cash flow is negative (Companies in investment phase who need lot of
debt in initial years of operation Telecom cos for example)
o For some industries, like Airlines, Retail etc Operating Leases might
have to capitalized and converted to debt. However, this is a complex
topic and beyond the scope of discussion at this point
The Financial Modeling could be beneficial to a vast majority of peoples,Some of the cases
are summarized below
Its an added advantage for those people who are pursuing CA, MBA, CFA,
FRM and Commerce graduates
Also the candidates having Degree, Diploma, in technical fields like B .TECH
or Engineering who wants to make a career in finance
Any individual who just want to gain knowledge out of passion or curiosity
Now after knowing Who can do Financial Modeling Course now let us look at what all it need ,
to go for a financial modeling training .
Usage of Excel
Though even if you know nothing about above mentioned knowledge then do not get dishearten
it simply means that you are supposed to take a course which starts from basics and covers MS
Excel in detail as Excel is very essential for Financial Modeling so there is no escape and this
part should be strong If you want to check out one such Online Course offered by us which
covers everything exhaustively then you can
Learn about all the most helpful Excel formulas in financial modelling: for free.
The material is extracted from our regular financial modelling training and is well proven with
delegates taking the course.
Excel has hundreds of formulas on offer. That can present a bit of a challenge: you need to
become fluent in the formulas that are going to be most helpful in financial modelling.
We think that, by sending you one email a day for a month, in just ten minutes a day we can
check that youre on top of critical Excel financial modelling formulas.
Learn Excel modelling formulas now for free
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To start with we build you an Excel modelling survival toolkit (note, at this stage were assuming
you can do a very few things like breathe, strap on a back pack, apply your own camouflage
paint, build a Sum function and press F1 for Excel help). Beyond that we want to make sure
youre totally on top of some of the Excel functionality we would regard as absolutely essential
in financial modelling:
2. Vlookup. So often in Excel modelling you need to pick out data from a table, so we
make sure youve got at least one data picking solution in your survival toolkit. To start
we make sure youre completely comfortable with Excels Vlookup formula one of the
trickier functions to put together.
3. Goalseek. Next we look at iterating with a model. In modelling youll want to vary an
input to see the impact on an output. Excels goal seek will help you with that. We think
its an essential tool in Excel financial modelling so we just make sure you know about it.
Well, maybe not, but youd be pretty close to surviving! With Shift F3 for insert function,
F1 beyond that for Excel help, summing up (Alt = is the shortcut), If formulas, a data
picking solution and some judicious use of goalseek youd be getting most of the way there most
of the time and youd have almost enough theoretically to start carving out a career in corporate
finance. But of course theres more to modelling than that! To start we just want to make sure
youre totally on top of some of the basics that youll use most regularly.
As our course program progresses we gradually start to get into more advanced modelling
territory. Not all of it youll use every day but its interesting to take a quick look at other
formulas youll also find useful. Just so you know about them and have some clear reference
examples for the future.
Along with the must haves weve got a list of lessons covering useful Excel formulas likely to
help you address specific financial modelling challenges:
5. Choose. By now weve looked at Vlookup but Excel provides us with multiple other
data picking solutions. Some will provide a shorter neater solution depending on the
exact problem youre trying to solve. On the course today we look at Excels Choose
formula. It provides a short neat solution to data picking when youve got a small data
set. Its so short and neat we think youll grow to love it. When you have a small data set,
we think the opportunity to use Choose will feel as good as getting a free lunch!
6. Drop-down boxes. Have you seen those groovy graphical combo boxes or drop down
boxes in Excel? They dont actually do anything clever in Excel all they do is change a
very simple input. But they can make your model much more user friendly and make you
look like a modelling expert pretty quickly. On todays course lesson we look at combo
boxes, including a few advanced applications you may not have seen before.
7. Cell names. Today we look at cell names in Excel (Ctrl F3 and Ctrl Shift F3
are the keyboard shortcuts). We have a few serious warnings around names. Some people
like them so we feel we have to make you aware of the pitfalls.
8. Scenario manager. When we looked at goal seek we found we could access it from the
Data tab, then Data Tools, What If Analysis. On todays course lesson we take a
quick look at something else you might have noticed sitting under that menu item:
Excels scenario manager. We will tell you why were not great fans of it but it regularly
gets questions on our financial modelling course training so we think it would be wrong
to skip it here.
9. Model switching. In todays course lesson we give you some clues about switching on
and off large swathes of your model. Today is all about model switching.
10. Custom formats. Next we look at custom formatting in Excel (Ctrl 1). We help
you get that (bracket) formatting into Excel that accountants seem so fond of. (Bracket)
formatting is not on the list of Excels standard formats so you need to be able to
customise/ build one of your own. If you want to keep the accountants in your life happy.
11. Index. Today we add Excels Index formula to our list of other data picking solutions
(on top of the standard Vlookup and then Choose for a small data set). Some of our
financial modelling course attendees prefer Index because they like the logic and
reportedly it chews less Excel memory.
12. TRUE/FALSE checks. Did you know you can shortcut a full If formula? After todays
lesson we think you may decide to promise yourself never to use a full If formula again.
If you take that pledge, your models will suddenly be looking like theyve been created
by someone who really knows what they are doing. Todays course lesson is all about
Excels TRUE/ FALSE checks as an alternative to the standard If formula.
13. Data validation. Today its data validation: forcing users to enter particular values in a
spreadsheet. Weve seen data validation used in the spreadsheet that goes around the
office ahead of the Christmas dinner. Your choices are going to be Turkey (that has to
be on there), Nut roast (there has to be a vegetarian option but its never sounding
that exciting is it?) and Salmon (for everyone else). Nobodys ever going to be allowed
to put I want Beef Wellington against their name in the spreadsheet now are they?
Thats the kind of thing data validation is designed to help us with: forcing users to enter
a limited range of inputs. But weve regularly seen people apply data validation to
scenario switching in their modelling. We prefer the drop-down boxes (for good reasons
that we happily explain) but, because the two look very similar, we need to prepare you
for picking up someone elses model the one thats using data validation to switch
scenarios.
14. Password protection. You may feel youre surrounded by idiots: the kind that expect
to be able to order Beef Wellington for their Christmas dinner. We understand we feel
your pain. Along with data validation, password protecting a spreadsheet is something
you could find helpful. What that will do is stop other users making changes e.g. to
formulas in the Excel model youre circulating. Theyll only be able to change e.g. the
input cells you want them to change.
15. The Round formula. Do you have other issues with your colleagues? Are there a few
around who might see 1.5+2.4=3.8 in a spreadsheet, fail to realise that Excel stores
numbers to lots of decimal points out on the right hand side, and all were seeing is the
impact of rounding within Excel? Is there a risk that a colleague or client might get
themselves distracted by your apparent inability to be able to add correctly? Excels
Round formula is going to be really helpful for dealing with the obsessive compulsives in
your life. The ones who need to have all the pictures straight in the office, the mugs
stacked neatly in even numbers in the kitchen, and all the key totals looking like they add
up in the Excel spreadsheet.
16. Iferror/ Iserror. In todays lesson we look at using Excels Iserror and Iferror functions
to identify and reduce modelling errors.
17. Sumif, Sumifs and Sumproduct. Today we complete our list of favourite data picking
solutions, tackling some that can also help you add up/ consolidate data. This course
lesson covers Sumif and its bigger stronger beefier cousin Sumifs. We also look at the
Sumproduct formula which we think is the winner amongst all of them. It picks data. It
amalgamates data. It amalgamates over multiple rows and columns. It really is totally
awesome but youll get little guidance from Excels own F1 help on its super-powers.
18. Array formulas. Is there a chance that you could ever want to do two things at once
(in an Excel model)? In the previous lesson we met a couple of two-in one-formulas.
Sumifs kind-of combines an If formula with adding up. Sumproduct multiplies and adds
up. If you like the idea of a two-for-one special you might want to check out Excel array
formulas. Theyre probably one of the weirdest formulas youll ever see in Excel with
funny { } squiggly brackets at each end. Most people meet them first in someone elses
model when they interrogate the formula (F2) and then press Enter. The {brackets}
disappear and the formula and model break. Today youll find that Ctrl Shift Enter
is what you need to press to generate the brackets and make the array formulas work.
19. Data tables. Our investment banking delegates seem to love Excel data tables with
good reason. They help you with your sensitivity analysis, automatically creating the
table that shows the impact of a first variable (across the top) and a second key variable
(down the side) on the output (in the middle). In todays course lesson we also look at the
potential to use a special case single variable data table to display the results of our
scenario analysis.
20. Excel date formulas. Usually the top of our model will have date headings running
across the top of it. Today we focus on rolling dates forward in the model. We come out
with a strong recommendation on the EOMonth formula.
21. Escalation factors. In a large project model we might want to escalate revenues up by
e.g. a % contracted growth rate and expenses e.g. by % inflation. Todays course lesson
looks at pitfalls in modelling escalation factors.
22. 3D referencing. Excels 3D referencing enables you to play a cool trick when totalling
data across multiple tabs. You wont use it very often but youll love the occasional
opportunity to use it: itll be a good day at the office that one.
23. The watch window. Excels watch window helps you keep key results in view so that
you get the earliest possible notice when your model falls over with #REF! errors. Cool.
24. Excel macros. If youre unfamiliar with them, today we get you started with Excel
macros.
25. Deliberate circular references. In this lesson were preparing you for a chance
encounter with a Dark Lord of financial modelling: the one who is in the habit of leaving
deliberate circular references in a model. The Dark Lord expects the model to work (even
though hes put a circular reference in it), and expects you to know what to do with it.
This could be scary.
26. Max/ Min formulas. Weve already shown you how to use TRUE/ FALSE checks as
an alternative to the standard If formula, making you look like a modelling pro. Today we
add to that the alternative of the Min or Max formula.
27. Modelling tax losses. At one level todays just an example of how you can apply Min/
Max formulas in the place of the If formula. At another its our little gift to you: a record
of how you can bank tax losses without getting yourself tied in complex knots. You can
save it for later.
28. Pivot tables. Today is a quick lesson, just checking that you know how to create an
Excel pivot table. We also make sure youre aware of the alternatives that Excels
standard formulas provide us with that you dont always feel obliged to jump in and
create a huge table manipulating a lot of data.
29. Edit links. Now were easing off with a short lesson on managing Excels edit links
settings. Youre most likely to encounter this when you get someone elses model and
Excel warns you that the model contains broken links. We also re-iterate one of warnings
on names because names can end up acting like broken links in a model. Ctrl F3 will
tell you whether youve got that kind of problem.