Step-By-Step Guide To Build A Financial Model From Scratch in 2025 | By Proschool Experts

In India’s booming finance sector, financial modeling is quickly becoming a must-have skill, especially if you’re aiming for a career in investment banking, corporate finance, or equity research. With India’s financial services industry projected to grow significantly over the coming years, professionals with financial modeling skills are in high demand.

According to LinkedIn India, financial analysts with advanced modeling skills can earn ₹7-15 lakhs per year, and for roles in investment banking or private equity, that figure can go even higher.

Financial modeling isn’t just another line on your resume—it’s a skill that helps you predict a company’s financial future, assess risks, and make sound recommendations.

NASSCOM reports that India’s financial services industry will be one of the top sectors driving employment in the coming decade, especially as more Indian companies go global and international companies invest in India. This means that there’s a huge opportunity for commerce students with strong modeling skills.

Think of a financial model as a GPS for a company’s finances. Just like a GPS shows multiple routes and outcomes, a financial model helps predict how factors like revenue growth, expenses, and investments will impact a company’s future.

Imagine you’re assessing whether a company should launch a new product line. With a financial model, you can forecast potential profits, estimate costs, and even gauge risks, helping stakeholders make data-backed decisions.

For commerce students in India, mastering financial modeling is essential for entering fields like investment banking, corporate finance, and consulting. It’s a skill that not only sets you apart but also enhances your ability to make smarter, data-driven decisions.

In this blog, we’ll take you through the fundamentals of building a financial model from scratch, guiding you step-by-step so you can dive into finance roles with confidence. Ready to become a financial modeling pro? Let’s get started!

How to Make a Financial Model: Understanding the Basics

A financial model is essentially a structured representation of a company’s financial performance in the past, present, and future. It’s a tool used by analysts, investors, and business owners to make decisions based on various financial scenarios. The most important aspect of financial modelling is that it allows you to see how a company’s financial health changes with different business decisions or market conditions.

The model typically consists of three key financial statements:

1. Income statement: This is where you track the company’s revenues, expenses, and profits over a specific period. It helps you see how much money the company is making and where it’s spending that money.
2. Cash flow statement: Cash is king for any business, and the cash flow statement shows how cash moves in and out of the company. It covers operations, investments, and financing activities, giving you an idea of liquidity and whether the company can meet its obligations.
3. Balance sheet: This provides a snapshot of the company’s financial position at a given time. It includes assets (what the company owns), liabilities (what the company owes), and equity (the value that shareholders own).

Together, these financial statements form the backbone of any financial model. They give you a detailed picture of a company’s financial health and help you predict how certain factors—such as an increase in revenue or a change in expenses—can impact the business.

Before diving into creating a model, it’s essential to understand these basic elements. Whether you’re a student or a professional, mastering these statements will give you the foundation you need to start building your financial model.

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How to Build a Financial Model Step by Step

Building a financial model from scratch can seem intimidating, but when broken down into steps, it becomes much more manageable. Here’s a simplified guide to building a financial model:

1. Define the Purpose: Before you start, clarify why you’re building the model. This could be for budgeting, fundraising, or forecasting future growth. Having a clear goal will determine how you structure your model and what data you focus on. For example, if you’re building a model to help a company raise funds, you’ll want to emphasise revenue forecasts and financial health.
2. Gather Necessary Data: Next, you need historical financial data to build your model. This typically includes revenue, expenses, assets, liabilities, and cash flow figures from previous years. Historical data serves as the foundation for your projections. The more accurate and comprehensive your data, the more reliable your model will be.
3. Create Financial Statements: Once you have the data, it’s time to create the three main financial statements (income statement, balance sheet, and cash flow statement). These statements are interconnected, so changes in one will impact the others. For example, if you increase revenue in the income statement, that will also affect the cash flow and the balance sheet.
4. Build Supporting Schedules: To enhance the accuracy of your model, you’ll need to add supporting schedules. These include detailed calculations for things like depreciation, working capital, and debt repayment schedules. Supporting schedules break down complex parts of your model and ensure that all calculations are accurate and based on realistic assumptions.
5. Perform Sensitivity Analysis: Finally, once your model is built, you need to test it by running a sensitivity analysis. This involves changing key assumptions, such as growth rates or expenses, to see how sensitive the model is to different scenarios. Sensitivity analysis helps you understand the range of potential outcomes, which is crucial for making informed decisions.

This step-by-step process allows you to build a model that not only reflects the current state of a company but also predicts how it might perform in the future under various conditions.

Also Read – 3 Way Financial Model: A Complete Guide On What It Is & How To Building One

How to Create a Financial Model in Excel: The Essential Tools

Excel is the most commonly used tool for building financial models, and for good reason. It provides flexibility, accuracy, and ease of use, making it the go-to software for financial analysts and professionals worldwide. Here’s why Excel is essential for financial modelling and how you can leverage its features:

• Formulas: Excel’s built-in formulas allow you to automate calculations and link different parts of your model. For example, using formulas like SUM, IF, and VLOOKUP can help you perform complex calculations quickly and with fewer errors.
• Formatting and Linking Statements: Excel enables you to format your model for clarity. You can use colours, fonts, and cell borders to make your model easier to read. Linking financial statements within Excel ensures that changes made in one statement automatically reflect in the others, creating a dynamic model.
• Advanced Features: Beyond basic formulas, Excel offers advanced tools like pivot tables and what-if analysis. Pivot tables help you summarise large data sets, making it easier to analyse trends. What-if analysis lets you change input variables to see how different scenarios affect your model’s outcome.

For students learning financial modelling, mastering Excel’s tools is essential. It allows you to create dynamic and robust models that can handle different financial situations, making you a valuable asset in finance-related roles.

How to Make a Financial Model for a Company: Key Inputs and Assumptions

Building a financial model for a company requires more than just plugging numbers into a spreadsheet. You need to carefully select the key inputs and assumptions that will shape the model. These include:

• Revenue Forecasts: Predicting how much money the company will make is one of the most important aspects of financial modelling. To do this, you need to understand the company’s sales pipeline, market trends, and customer behaviour. By analysing historical revenue data and market conditions, you can create reasonable projections for future revenue.
• Cost Estimates: Equally important are the costs the company will incur to generate that revenue. This includes fixed costs (rent, salaries) and variable costs (materials, production expenses). Accurate cost estimates help you assess the company’s profitability.
• Cash Flow Projections: Cash flow is the lifeblood of any business. In your model, you need to forecast how much cash the company will generate and how it will use that cash. This includes everything from operating cash flow to cash used in financing and investments.

Accurate inputs and assumptions are critical to the credibility of your financial model. If the assumptions are too optimistic or unrealistic, the model will give misleading results. Therefore, it’s important to base your inputs on real-world data and reasonable estimates.

9 Best Practices for Financial Modeling: Ensuring Accuracy

Creating an accurate and reliable financial model is essential for making sound financial decisions. A poorly constructed model with errors or inaccurate assumptions can lead to flawed conclusions and costly mistakes. Here are several best practices to ensure that your financial model is both accurate and user-friendly:

1. Start with a Clear Structure:

   • A well-organised model is key to avoiding confusion and errors. When building a financial model, follow a clear and logical flow, typically broken into sections such as inputs, calculations, and outputs. Use separate sheets for each major section (e.g., assumptions, income statement, balance sheet, and cash flow statement). This not only improves readability but also makes it easier to debug or update the model later.
   • Tip: Color-code cells to differentiate between input cells (user data), calculation cells (formulas), and output cells (results). This visual distinction helps others (or yourself) navigate the model with ease.

2. Ensure Consistent Formulas and Formatting:

   • One of the most common issues in financial modelling is the use of inconsistent formulas across different cells or sheets. Ensure that the same types of calculations are treated consistently throughout the model.
   • Tip: Copy and paste formulas across similar rows or columns to ensure consistency. When working with multiple sheets, use references that are uniform and well-documented to make tracking easier.

3. Build Clear Inputs and Assumptions:

   • The assumptions you use in your model (e.g., revenue growth rates, cost percentages) should be clearly labelled and easy to find. All input variables should be in one dedicated section or sheet, typically at the start of the model.
   • Tip: Include a description for each input to explain its purpose. This way, anyone reviewing the model will understand why certain assumptions were made and can easily adjust them as needed.

4. Use Transparent and Simple Calculations:

   • Simplicity is crucial in financial modelling. Avoid layering too many formulas within one cell. If a calculation is too complex, break it down into several steps across different cells.
   • Tip: Use comments and notes to explain the purpose of more complicated formulas. This will help anyone who uses the model in the future to understand the logic behind each calculation.

5. Error-Checking Mechanisms:

   • Regularly check your model for errors as you build it. Even experienced financial modellers can make mistakes, so incorporating error-checking mechanisms can help catch issues early. For example, ensure that the total assets on the balance sheet equal total liabilities plus equity.
   • Tip: Use Excel’s built-in error-checking features such as “Trace Precedents” and “Trace Dependents” to see which cells feed into or are affected by a particular calculation. Conditional formatting can also be applied to flag any inconsistencies or unrealistic values, such as negative revenue figures.

6. Perform Sensitivity Analysis:

   • A critical aspect of financial modelling is understanding how sensitive your model is to changes in key assumptions. Sensitivity analysis allows you to test how different variables—like revenue growth rates, cost changes, or interest rates—affect your outcomes. By modelling a range of scenarios (best case, base case, and worst case), you can provide a more comprehensive view of potential risks and opportunities.
   • Tip: Set up dynamic inputs that let you easily change key assumptions and immediately see how they affect the overall results.

7. Document Everything:

   • Financial models are often passed between teams or reviewed by different stakeholders, so it’s essential that your model is easy to follow. Include clear labels, and add a documentation sheet if necessary.
   • Tip: Use cell comments and text boxes in your model to explain tricky parts. A well-documented model will ensure that others can pick up where you left off without struggling to understand your logic.

8. Regularly Update the Model:

   • Financial models are dynamic tools that should be updated as new information becomes available. Whether it’s a change in market conditions, new financial data, or revised business strategies, updating your model ensures its ongoing relevance and accuracy.
   • Tip: Regularly review and update the assumptions and forecasts in your model to reflect the most current data.

9. Avoid Overcomplicating the Model:

   • While adding detailed calculations and assumptions can make the model appear sophisticated, complexity can lead to confusion and more opportunities for errors.
   • Tip: Focus on the key drivers of the business that truly impact the outcomes. Keep non-essential information to a minimum, and ensure that anyone using the model can easily follow its structure.

Also Read – Top 14 Financial Forecasting Models for Accurate Projections

4 Common Financial Modeling Mistakes to Avoid

Creating a financial model is like building a complex puzzle—each piece needs to fit perfectly for the big picture to make sense. But common mistakes can throw your model off track. Here are a few errors to avoid to ensure your model remains accurate and reliable.

1. Using Inconsistent Formulas

   • Imagine you’re adding up numbers but using different formulas in each cell. Inconsistent formulas can lead to inaccurate results and confusion.
   • Tip: Keep formulas consistent across similar calculations. If you’re summing up revenue for each month, use the same formula throughout. Copy-paste is your best friend here!

2. Relying on Unrealistic Assumptions

   • It’s tempting to predict stellar growth every quarter, but unrealistic assumptions can make your model unreliable. Investors and stakeholders want to see a balanced, realistic forecast.
   • Tip: Base your assumptions on historical data or industry averages. For example, if past revenue growth is 5%, projecting 15% without strong reasons can make your model look like a Bollywood fantasy rather than a credible forecast.

3. Forgetting to Link All Statements Correctly

   • The income statement, balance sheet, and cash flow statement are like best friends in a financial model—they need to stay connected. Forgetting to link them can lead to major inconsistencies.
   • Tip: Use cell references to connect the statements. For instance, if net income appears in your income statement, link it directly to the balance sheet’s retained earnings rather than re-entering the number.

4. Overcomplicating the Model with Excessive Data Points

   • Adding every tiny detail might seem thorough, but too many data points can clutter the model and make it hard to follow.
   • Tip: Stick to key drivers and essential details. Avoid stuffing the model with irrelevant information. Remember, simplicity is often the key to accuracy.

Avoiding these common mistakes will help you create a cleaner, more reliable model that’s easy for others to understand and trust.

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How Financial Models Are Used Across Different Finance Careers

Financial modeling isn’t a “one-size-fits-all” skill. Depending on your role, the type of financial model you’ll build and use will vary. Let’s look at how financial models are applied across different finance careers.

• Investment Banking: In investment banking, financial models are essential for evaluating big decisions, like mergers or acquisitions. Picture a company considering buying another company. Investment bankers build a model to calculate the target company’s value and project future cash flows to see if the investment is worth it. They also use models to explore different funding options, analyzing how debt or equity financing would affect returns.
• Corporate Finance: For corporate finance professionals, financial models are used for budgeting and internal planning. Imagine a company deciding whether to launch a new product. A financial model can help forecast revenue, expenses, and profitability, giving management a clear picture of potential outcomes. Corporate finance models focus on internal cost control and financial stability.
• Equity Research: Equity research analysts use financial models to assess the value of stocks. They look at a company’s financial performance, forecast future earnings, and estimate a fair stock price. If you’ve ever wondered how analysts come up with target prices for stocks, it’s often through valuation models. These models help investors decide whether to buy, hold, or sell a stock.

Understanding how financial modeling applies to different careers can help you target the skills you need based on your chosen path.

Also Regards – 9 Best Financial Modelling Courses – Online & Offline

7-Step Checklist for Reviewing Your Financial Model

Before presenting your financial model, it’s essential to ensure everything is accurate, consistent, and clear. Use this checklist to review your model, spot errors, and make improvements.

1. Confirm All Formulas Are Consistent

   • Check that similar calculations use the same formula throughout. Inconsistent formulas can lead to inaccurate results and make the model harder to follow.
   • Example: If you’re calculating monthly revenue growth, ensure each month’s growth formula is identical.

2. Ensure Assumptions Are Realistic and Well-Documented

   • Clearly document all assumptions (e.g., revenue growth, cost structure) in a dedicated section. This makes it easy for others to understand the basis of your projections.
   • Tip: Add comments or notes next to assumptions explaining why each one was made. This transparency is helpful for anyone reviewing or auditing the model.

3. Test the Model with Sensitivity Analysis

   • Use sensitivity analysis to understand how changes in key assumptions affect outcomes. Adjusting variables like growth rate, costs, or interest rates can show potential risks and returns.
   • Example: If you increase the revenue growth rate by 5%, how does that impact net income or cash flow? Sensitivity analysis helps you visualize best-case, worst-case, and most-likely scenarios.

4. Verify that Total Assets Equal Total Liabilities Plus Equity

   • This is a crucial step. The balance sheet must always balance, or there’s an error somewhere in your calculations.
   • Tip: If total assets don’t match total liabilities plus equity, review all linked cells and calculations until the discrepancy is resolved.

5. Label All Tabs, Sections, and Key Calculations Clearly

   • An organized model is a user-friendly model. Label tabs, sections, and key calculations to make it easy for others to understand and follow.
   • Example: Use descriptive names for each sheet (e.g., “Income Statement” rather than “Sheet2”) and color-code input cells differently from calculation cells for clarity.

6. Check for Common Errors

   • Use Excel’s “Trace Precedents” and “Trace Dependents” tools to check for formula errors or broken links. This ensures all parts of the model are working correctly.
   • Tip: Apply conditional formatting to highlight any unusual values, such as negative revenue, which may indicate a mistake.

7. Include a Summary for Key Outputs

   • Add a summary section that highlights key results, like projected net income, cash flow, and total assets. This makes it easy for users to quickly understand the model’s key outcomes.
   • Tip: Use charts or tables to visualize this summary data—visual aids can enhance comprehension, especially during presentations.

Using this checklist ensures that your financial model is accurate, reliable, and easy for others to review and understand. After all, the best financial models are not only correct but also clear and easy to interpret.

Master Financial Modeling with IMS Proschool

Mastering financial modelling is an essential skill for any student pursuing a career in finance, investment banking, or corporate finance. A well-structured financial model can help you analyse a company’s past performance, predict its future, and make informed decisions based on real data. By learning how to build these models from scratch, you’ll gain a significant advantage in the competitive world of finance.

IMS Proschool offers a comprehensive Financial Modeling course designed to teach you everything you need to know. With hands-on projects, expert guidance, and real-world applications, IMS Proschool ensures you have the skills to create professional-grade financial models.

FAQs:

How do I make a financial model for a startup?

To create a financial model for a startup, follow these key steps:

• Define the model’s purpose: Identify whether it’s for fundraising, planning, or forecasting. This helps set the focus for your model.
• Forecast revenue and expenses: For startups, revenue projections are often based on market research or estimated growth. Include fixed and variable costs like rent, salaries, and production costs.
• Create the financial statements: Build the income statement, balance sheet, and cash flow statement. These will show how the business generates profits, uses its assets, and manages cash flow.
• Build supporting schedules: Add detailed schedules for items like depreciation, working capital, and debt repayment.
• Test your assumptions: Perform sensitivity analysis by adjusting key assumptions to understand how different scenarios could impact the business.

How do I create a financial model in Excel?

Creating a financial model in Excel involves several steps:

• Organise the structure: Start with a clean, well-organized Excel sheet. Use different tabs for assumptions, financial statements, and calculations.
• Input assumptions: Clearly label your assumptions (e.g., growth rates, costs) on a separate tab so you can easily update them.
• Build financial statements: Use Excel formulas like SUM, IF, and VLOOKUP to build interconnected financial statements (income statement, balance sheet, and cash flow statement).
• Link the statements: Ensure changes in one statement (e.g., revenue in the income statement) automatically update other statements (e.g., cash flow).
• Use advanced Excel tools: Master features like pivot tables and what-if analysis to create dynamic models that can adjust to different scenarios.

What are the key steps to build a financial model from scratch?

Building a financial model from scratch involves the following steps:

• Define the model’s objective: Understand whether the model is for valuation, forecasting, or budgeting.
• Gather historical data: Collect past financial data (e.g., revenue, expenses, assets) to form a foundation for your model.
• Build financial statements: Create the income statement, balance sheet, and cash flow statement. Use formulas to link these statements so changes in one reflect in the others.
• Add supporting schedules: Include detailed schedules for depreciation, working capital, and debt to ensure accuracy.
• Perform sensitivity analysis: Test different scenarios by adjusting key assumptions and observing how the model’s outputs change.

Why is Excel used for financial modeling?

Excel is widely used for financial modeling because of its flexibility, ease of use, and powerful features:

• Formulas: Excel allows you to perform complex calculations and link different sections of your model.
• Formatting and linking: You can easily organize, format, and link financial statements, making it easier to follow.
• Advanced tools: Features like pivot tables and what-if analysis allow you to test different financial scenarios quickly.
• Customization: Excel offers a high level of customization, making it suitable for building models tailored to specific business needs.

How does IMS Proschool help with financial modeling?

IMS Proschool offers comprehensive training to help you master financial modeling. Their course includes:

• Hands-on projects: Real-world exercises where you build financial models from scratch.
• Expert guidance: Instructors with industry experience guide you through each step of the modeling process.
• Practical tools: Learn to use Excel’s advanced features like pivot tables, scenario analysis, and sensitivity testing.
• Mentorship: One-on-one mentoring to help you refine your skills and ensure your models are accurate and professional. Their course prepares you to build dynamic, accurate financial models, making you job-ready for roles in finance and investment.