Introduction to financial modelling.
*This page is to assist beginners and those who want to know what financial modelling is. This page will NOT consist of built models etc.*
**Most information found online, edited by me to provide a comprehensive picture of financial modelling**
Financial modeling is one of the most highly valued but thinly understood skills in finance. The objective is to combine accounting, finance, and business metrics to create an abstract representation of a company in Excel, forecasting figures into the future. These can be done by using financial models. These models are usually characterized by performing calculations and making recommendations based on that information. The model may also summarize particular events for the end user such as investment management returns or the Sortino ratio, or it may help estimate market direction, such as the Fed model.
Some standard uses for financial models (from corporatefinanceinstitute.com):
- making business decisions at a company.
- making investments in a private or public company.
- pricing securities
- undergoing a corporate transaction such as a merger, acquisition, divestiture, or capital raise.
What YOU need to have in order to do financial modelling (from corporatefinanceinstitute.com):
- A solid understanding of accounting
- Strong Excel skills
- Knowing how to link the 3 financial statements (income statement, balance sheet, cash flow sheet)
- Understanding how to build a forecast
- A logical framework for problem-solving
- Attention to detail
- Ability to distill large amounts of data into a simple format
- An eye for design and aesthetics
- Clear presentation skills
- The ability to easily zoom in on details, and zoom out to high-level strategy
An example of a financial model: (done by myself, not extracted from anywhere. If there are any errors or you don’t think that this is done right, please feel free to contact me and let me know. Its always fun to learn more)
**the above model used is known as the Residual Income model**
If you want to be certified as one who knows how to utilize financial models well, please head over to corporatefinanceinstitute.com. They have this certificate known as the FMVA, which is a fully online module that costs $497 USD. Here’s a screenshot of their webpage and the aforementioned module:
Will update more when I’m more knowledgeable about financial modelling. 🙂