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, forecasted into the future. This guide to financial modeling for beginners and “dummies” will teach you all the basics a beginner needs to know!
Forecasting a company’s operations into the future can be very complex. Each business is unique and requires a very specific set of assumptions and calculations. Excel is used because it is the most flexible and customizable tool available. Software, as an alternative, can be too rigid and doesn’t let you understand each line of the business the way Excel does.
Example of Financial modeling In Excel for dummies one of the most multipurpose and hot finance skills in today’s scenario. Financial models play a vital role in most major business decisions. Generally, the financial model is prepared whenever any company is planning to expand their business, evaluating particular project (also called project finance modeling), Merger or acquisition of particular (target) company and future forecasting of financials. For startup companies, the preparation of financial Model is important for further business planning and for big organizations Financial Modeling In Excel plays an important role in long-term planning, expansion, development, cost planning etc. Commonly financial models are prepared in excel spreadsheets.
Example of Financial modeling In Excel
So, let’s understand what is meant by financial Modeling In Excel? In simple words, financial modeling is the process of systematic forecasting of company financials. A financial model is prepared by financial analysts, investment bankers, equity research analyst and other finance professionals.
There is some basic financial modeling In Excel term that you need to understand.
- Forecasting: Forecasting means Company’s expected financial position in the future.
- Assumptions: To build a financial model you need to make some Hypothetical assumptions. Now, what does it means? Assumptions are used to present a condition that is not necessarily expected to occur but is consistent with the purpose of the projection.
- Financial statement Analysis: Financial Analysis means analysis of financial statements like income statement, Balance sheet, Cash Flow Statement using various techniques.
In this financial modeling for beginners and “dummies” guide, we have laid out the basic steps of how to build a financial model.
- Historical data
Input at least 3 years of historical financial information for the business.
- Ratios & metrics
Calculate the historical ratios/metrics for the business such as margins, growth rates, asset turnover, inventory changes, etc.
Continue building the ratios and metrics into the future by making assumptions about what future margins, growth rates, asset turnover, and inventory changes will be going forward.
Forecast the income statement, balance sheet, and cash flow statement into the future by reversing all the calculations you used to calculate historical ratios & metrics. In other words, use the assumptions you made to fill in the financial statements.
After the forecast is built, the company can be valued using the Discounted Cash Flow (DCF) analysis method. Learn more about DCF models and valuation.