What is Financial Modeling?

• part of corporate modeling

• concerned with the construction and
use of computer - based models
• to carry out the calculations necessary
to produce financial models
• based on given sets of assumptions
and predictions.

By Sohaib Jamal (FCMA) 2

 Learning objective of this workshop is to:

1. Develop financial statement projection

models and
2. Usage of tools and features available in
Microsoft Excel that supports flexile
modeling

By Sohaib Jamal (FCMA) 3

Financial Modeling & Excel
“A spreadsheet is considered the most widely
applicable tool for developing a financial
model”
Because of its ability to:
 Control the format and content of inputs
and outputs
 Quickly recalculate the entire model
when data or formulas are added or
modified.
 Rapidly provide comparative output for
alternative assumptions.
By Sohaib Jamal (FCMA) 4
 Sample Raw Worksheet

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Converted Financial Model

Sample Loan Model -3

Sample Loan Model -4

By Sohaib Jamal (FCMA) 6

Financial Modeling Steps
According to Alastair Day (One of the world renowned Financial
Modeler) following are Financial Models Check List
1. Planning the model 6. Goal Seek
2. Inputs, Process & 7. Data Tables
Outputs 8. Scenario Manager
3. Number & Text 9. Chart and Graphs
Formatting 10. Solver
4. Naming Ranges 11. Macros
5. Data Validations 12. Model Security
6. Conditional
Formatting

By Sohaib Jamal (FCMA) 7

 Chap-1 A Financial Projection Model
STRUCTURE
•The income statement
•The balance sheet
•The cash flow statement

AN ESTIMATOR, NOT A PREDICTOR

It is merely a tool to estimate what a company’s future

financial profile might be, given certain assumptions
about its future performance.

By Sohaib Jamal (FCMA) 8

 CRITICAL OUTPUTS
•Earnings before interest and taxes (EBIT):
•Revenue and net income:
•Cash flow from operations:
•Operating working capital:
•Net plant, property, and equipment (PPE)
and capital
•expenditures:
•Levels of debt and equity:

By Sohaib Jamal (FCMA) 9

 A ONE-OFF MODEL
One-off means that the model is built for a specific
project, to be used only for that one purpose

A TEMPLATE MODEL
A template model, on the other hand, is meant to be
used again and again, as the analysis workhorse for a
group or even a whole organization.

By Sohaib Jamal (FCMA) 10

 YOU AS THE MODEL DEVELOPER

•You are the finance expert,

•You are the excel expert,
•You are the virtual architect, manipulating
the screen and the structure of your model

By Sohaib Jamal (FCMA) 11

 Chap-2 Best Practices
STARTING OUT
•Have a Clear Idea of What the Model Needs to Do
•Start Slowly
•Understand the Users’ Level of Expertise
•Set Your Global Settings First
•Keep it Simple

By Sohaib Jamal (FCMA) 12

 LAYING OUT THE MODEL
• A Logical Arrangement for an Audit Trail
• Separate Input and Output Areas
• Be Consistent
• Keep Formatting Simple
• One Input for One Data Point
• Think Modular
• Keep Formulas Simple
• No Hard-Coded Inputs in Formulas
• Make All Calculations Visible
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 Chap-3 Accounting for Modeling
THE THREE FINANCIAL STATEMENTS

•Income Statement

•Balance Sheet and

•Cash Flow Statement

By Sohaib Jamal (FCMA) 14

 THE ACCOUNTING EQUATION

Total Assets = Total Liabilities + Shareholders’ Equity

DOUBLE-ENTRY BOOKKEEPING

This is to say that in the balance sheet, changes must

happen in a one-two sequence. If something changes,
something else must change also. In this way, the
balance sheet is kept balanced.

By Sohaib Jamal (FCMA) 15

 DOUBLE-ENTRY BOOKKEEPING AND CHANGE IN CASH

any change in an asset, liability, or equity

is either a source or a use of cash.
CHANGE IN CASH AND MODELING

An integrated financial statement model will

ensure that the balance sheet will always be
balanced, and by extension, the changes in cash in
the cash flow statement always foot to the
changes of cash in the balance sheet.
By Sohaib Jamal (FCMA) 16