What is Financial Modeling?

How does a retail organization decide when, where and how big a store to open? How does an entrepreneur decide whether his idea makes sense or how does a venture capitalist decide if he should fund that idea? How does an investment banker decide how much money will a company be able to raise and at what cost or how does he help his client arrive at a valuation for a merger and acquisition transaction? The answer is Financial modeling, one of the most highly valued, but thinly understood skills in financial analysis.
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Overview

Financial Modeling or Financial Modelling is a core skill that is almost mandatory for anyone who wants to build a career in finance. It is also important for anyone who wants to start his or her own business and even useful for sales/marketing professionals as it comes in handy in bidding for projects, determining payback/utility of campaigns etc.

Whenever we need to make a financial decision, we make a projection of what revenue is to be earned and costs are likely to be incurred and on the basis of such projections, evaluate if that is a wise decision. In a stock market analysis, we look at the past performance of a company to project what the revenue, costs and profit of the company are likely to be and, therefore if we should buy, sell or hold that share.

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Applications Financial Modelling

  • Investment Banking / Equity Research

Financial Modeling is the basic tool for fundamental analysis and valuations. Investment bankers use it to arrive at a valuation in M&A or fund raising transactions. Equity Analysts use it to value stocks and come up with buy/sell/hold recommendations.

  • Project Finance/Credit Rating

Financial models help bankers, credit analysts to project future revenues and costs and to make an informed judgment about a project’s viability. They are then able to decide if they should extend loans or what the credit rating of a project or company should be.

  • Corporate Finance

Financial Modeling is used by companies to assess their own finances and projects.  It is hence an input in creating funding plans for corporate projects.

  • Entrepreneurs/Private Equity

Entrepreneurs use Financial Models to present their plans to potential investors as much as to plan their strategies. Running different simulations can often be an important tool in avoiding potential risks.

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Types of Financial Models

Financial Models can vary in form, type and complexity based on the purpose for which they are built. It can be a one sheet model for a quick analysis or it can be a multi-sheet, multi workbook model with several cross links for a company or an industry. Some of the common applications of financial modeling are:

Valuation using DCF

Discounted Cash Flow (DCF) analysis is one of the most common methods of valuation. DCF analysis gives the result of a company’s current value, known as “net present value,” by forecasting its future free cash flows. It functions on the principle that the value of a business is the sum of its projected future free cash flows, discounted at a suitable rate.

Leveraged Buyout Model (LBO)

In a leveraged buyout a firm finances an acquisition through a large amount of debt. So the LBO modeling exercise is done to estimate whether the business is likely to sustain the debt or what level of business performance will be required to make an eventual sale and retire the debt.

M&A model

The entire objective of merger modeling is to understand the impact of an acquisition to the acquirer’s EPS and how the new EPS compares with the existing one. If the new EPS is higher, the transaction is called “accretive” while the opposite scenario would be termed “dilutive”.

Comparable Company Analysis

In this analysis we compare the financial metrics of a company against similar firms in the industry. It is based on an assumption that similar companies would have similar valuation multiples, such as EV/EBITDA, P/E, P/BV.

Credit Rating Model

As the name suggests, this model is mainly used by Credit analysts to assess the creditworthiness of the company. The model makes assumptions regarding the future earnings, cost and ebitda margins and assesses if the company will have the ability to pay interest and principle.

Financial Modeling Course Opportunities

With time and emerging technologies, the methodologies and techniques in the finance industry are also advancing. This has led to the concept of Financial models that help in efficient and easy analysis thus making Financial Modeling a pre-requisite for finance professionals in India.

Financial Modelling course opens doors to opportunities in Equity Research, Investment Banking, Credit Ranking Analysis, Financial Analysis, Business Analysis, Project Finance, Fund Management, and Commercial Banking.

Financial modelling course is ideal for professionals at every level including CAs, CFA® Charter holders, FRMs, MBAs, B.Tech graduates and Commerce graduates.

With our financial modelling courses, you can learn how to:

  • Apply a structured approach to financial modelling
  • Outline the hallmarks of good financial models
  • Build a two-stage DCF business valuation model
  • Build a monthly FP&A cash flow forecast model
  • Build a financial model to analyze a business’ operations
  • Build a mergers & acquisitions model
  • Build a leveraged buyout (LBO) model
  • Build a real estate financial model
  • Build a start-up company model
  • Build a mining financial model
  • Build a renewable energy financial model

ELIGIBILITY CRITERIA FOR FINANCIAL MODELLING COURSE

Prerequisites

Financial Statements; Financial Management and Ratio Analysis; Valuation Methods

Excel, Written Communication, Analytical Ability

Core Skills

Financial Statement Analysis, Building financial statements in Excel, Building Financial models

Related Skills / Knowledge

Understanding of Financial markets like market structure, mutual funds, debt markets, credit appraisal and ratings etc.

Financial Modelling Course Details : CLICK HERE

Possible Financial Modelling career opportunities

Junior Research Analyst/Associate

Role

  1. Sector research and Company profiling
  2. Extracting quantitative data
  3. Writing research report
  4. Building model from scratch
  5. Testing of Financial Models
  6. Working on global sector/company research

Companies

JP Morgan Chase  | Cognizant Technologies | Morning Star | Integreon | Irevna | Aranca | CRISIL

Merger and Acquisition Associate

Role

  1. Client advisory : Corporate Finance,  Mergers & Acquisition
  2. Conducting financial research for company and industries
  3. Competitor Study
  4. Business Valuation
  5. Project Feasibility report (Financial Modeling)

Companies

S&P Global | Ernst & Young | Other Advisory and Valuation companies

Investment Banking Associate

Role

  1. Evaluate options to buy/partner
  2. Analyze competition landscape, prepare good pitch-book presentation
  3. Build financial models
  4. Conduct qualitative & quantitative research
  5. Create strategic rationale, positioning pages, pitch book, investment deck

Companies

Bank of America, Merill Lynch | Morgan Stanley | Edelweiss | Wipro BPS

Financial Planning & Analysis – Junior Manager

Role

1.Building financial models to forecast future

performance.

  1. Assisting CFO to formulate budget and in day-to-day activities
  2. Periodic financial planning
  3. Variance Analysis
  4. Profitability Analysis

Companies

Accenture | GENPACT | Hewlett Packard | IDBI Life Insurance |Idea International

Equity Research Associate

Role

  1. Conduct end-to-end research covering the sector
  2. Writing research reports,  financial modeling (historical /projections)
  3. Valuation and DCF models

Companies

Cognizant Technologies Solution | Capgemini Consulting

Debt Syndication-Junior Executive

Role

  1. Preparation of Financial Model, Information Memorandum, Project Reports
  2. Dealing with bank/NBFCs/Fls
  3. Legal documentation, due-diligence

Companies

Vivro Financial Services | KK Capital services | Blend Financial Services
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FAQ’s

Financial modeling is a process used to create a numerical representation of a financial situation or scenario. It is typically used to forecast the performance of a business, project, or investment, and can be used for a wide range of purposes, including:

  1. Planning and budgeting: Financial modeling can be used to create a detailed budget or financial plan for a business, project, or investment. This can help to identify potential risks and opportunities, and to set goals and targets for the future.
  2. Decision making: Financial modeling can be used to evaluate the potential financial impact of different decisions or scenarios. For example, a company might use financial modeling to compare the potential returns of different investment opportunities, or to assess the financial impact of expanding into a new market.
  3. Valuation: Financial modeling can be used to estimate the value of a business, project, or investment. This can be useful for a variety of purposes, including mergers and acquisitions, initial public offerings, and private equity investments.
  4. Risk assessment: Financial modeling can be used to assess the risks associated with a particular investment or business venture. This can help investors and decision makers to understand the potential downside of a particular opportunity, and to make informed decisions about whether or not to proceed.
  5. Communication: Financial modeling can be used to communicate financial information to stakeholders, such as investors, lenders, and employees. It can help to clearly and concisely present the financial implications of different decisions or scenarios.

Financial modeling is used by a wide range of businesses and organizations in a variety of industries. Some examples of businesses that might use financial modeling include:

  1. Corporations: Large corporations, especially publicly traded ones, often use financial modeling to forecast their financial performance, make strategic decisions, and communicate with investors and other stakeholders.
  2. Startups and small businesses: Financial modeling can be useful for startups and small businesses as a way to create a detailed financial plan, evaluate the feasibility of a new product or service, or raise capital from investors.
  3. Investment banks: Investment banks use financial modeling extensively in their work, including to value companies and securities, assess the risk of investments, and advise clients on financial matters.
  4. Private equity firms: Private equity firms use financial modeling to evaluate the potential returns of different investment opportunities, such as buying and restructuring a company or investing in a new venture.
  5. Hedge funds: Hedge funds use financial modeling to evaluate the potential returns and risks of different investments, and to develop trading strategies.
  6. Management consulting firms: Management consulting firms often use financial modeling to help their clients make strategic decisions, such as whether to enter a new market or invest in a new product or service.
  7. Nonprofit organizations: Nonprofit organizations may use financial modeling to create budgets and financial plans, evaluate the feasibility of new programs or initiatives, and communicate with donors and other stakeholders.

There are several ways you can learn financial modeling:

  1. Online courses: There are many online courses that can teach you the basics of financial modeling. These can range from short, self-paced courses to more comprehensive, structured online programs.
  2. Books: There are also many books available that cover the basics of financial modeling, as well as more advanced concepts. Reading these can be a good way to learn at your own pace.
  3. Classroom-based programs: Many colleges and training institutes offer classroom-based courses in financial modeling, which can be a more structured way to learn the subject.
  4. Professional certification: There are also some professional certifications available in financial modeling, such as the Certified Financial Modeler (CFM) designation. These programs often require you to pass an exam and may also involve coursework or other requirements.

Regardless of which method you choose, it’s important to be dedicated and consistent in your learning, and to practice regularly in order to become proficient in financial modeling.

Financial modeling typically requires a strong foundation in accounting principles and financial statements. This is because financial modeling involves building a numerical representation of a company’s financial situation, which requires an understanding of how to read and interpret financial statements, such as the balance sheet, income statement, and cash flow statement.

In addition, financial modeling often involves forecasting a company’s future financial performance, which requires an understanding of how different financial and operating metrics are interrelated. This can require an in-depth understanding of topics such as revenue and expense recognition, working capital management, and capital budgeting.

That being said, the specific level of accounting knowledge required for financial modeling will depend on the complexity of the model and the specific goals of the analysis. Some financial models may be relatively simple and require only a basic understanding of accounting principles, while others may be more complex and require a more in-depth understanding of financial statements and financial ratios.

The duration of a financial modeling and valuation course can vary significantly depending on the specific course and the level of detail covered. Ultimately, which duration to select will depend on the specific goals and needs of the learner.

In general, financial modeling and valuation courses can be grouped into three broad categories based on their duration:

  1. Short courses: These courses may be as short as a few hours, and are typically designed to cover the basics of financial modeling and valuation. They may be suitable for individuals who only need a brief overview.
  2. Intermediate courses: Intermediate courses may last a few days to a week. They usually cover more topics in financial modeling and valuation, and may include hands-on exercises.
  3. Comprehensive courses: Comprehensive courses may last several weeks or even months, and are typically more in-depth and comprehensive than intermediate courses. They usually cover a wide range of topics in financial modeling and valuation in great detail, and include hands-on exercises, case studies, and other learning materials.

Building a financial model of a company typically involves the following steps:

  1. Identify the purpose of the financial model: The first step in building a financial model is to clearly define the purpose of the model. This might include forecasting the company’s financial performance, evaluating the feasibility of a new product or service, or assessing the financial impact of a strategic decision.
  2. Gather data: The next step is to gather all of the relevant data that will be used in the financial model. This might include financial statements, industry benchmarks, market data, and other sources of information.
  3. Build the structure of the model: Once the data has been gathered, the next step is to build the structure of the financial model. This typically involves creating a spreadsheet or other digital tool that will be used to input and organize the data. The structure of the financial model will depend on the specific purpose and goals of the model, as well as the complexity of the analysis.
  4. Input the data: After the structure of the financial model has been created, the next step is to input the data that has been gathered. This might include financial statements, market data, and other relevant information.
  5. Develop the assumptions and calculations: Once the data has been inputted, the next step is to develop the assumptions and calculations that will be used to forecast the company’s financial performance. This might involve making assumptions about future sales, expenses, and other financial metrics.
  6. Test and refine the model: After the financial model has been built, it is important to test and refine the model to ensure that it is accurate and reliable. This might involve reviewing the model for errors, adjusting the assumptions and calculations as needed, and running sensitivity analyses to test the model under different scenarios.
  7. Use the model: Once the financial model has been built and tested, it can be used for a variety of purposes, such as forecasting the company’s financial performance, making strategic decisions, and communicating with stakeholders.

IMS (Institute of Management Studies) offers a financial modeling certification in association with National Skill Development Corporation (NSDC) and National Stock Exchange of India (NSE). This certification is equivalent to a professional certification in Financial Modelling that is accepted by hiring companies.

It is important for individuals considering a financial modeling course to thoroughly research and compare different programs to determine which one is the best fit for their needs and goals.

Proschool focuses on the following aspects

  • Knowledge : Financial Statement analysis, Corporate Finance, Financial mathematics and more
  • Skills: Problem solving, Advanced Excel, Data gathering
  • Modeling techniques: Project finance techniques, Equity valuation techniques
  • Expert faculty: Hand-picked instructors with professional qualifications and experience 
  • Course format: 40% theoretical and 60% application of theory (via active learning)
  • Active Learning: Focus on learning by doing. Each concept or theory is applied by students in a hands-on practical manner via case work using Excel and similar tools. 
  • Delivery mode: Hybrid learning where students study concepts and theory online on Saturday and apply the same via Active learning on Sunday in classroom mode.