Overview of Financial Modeling - Company Finance Model Concept

 Financial modeling refers to the conceptual representations of a company's financial statements. The advantage of creating these models is that it helps decision-makers to make decisions based on the company's finances. 

Financial modeling is a broad term that can mean different things to different people, although it usually refers to accounting and corporate finance applications or quantitative finance applications.

Creating financial models is one of the most complex tasks. It is hard to understand the nature of relationships between various financial variables that are culminated in financial statements. 

A financial model allows a business to simulate its revenues and expenses in different scenarios. Financial models are frequently used by companies when considering decisions like- launching a new product line, acquiring a competitor.

The most effective financial models include a set of fundamental assumptions. The increase or decrease in gross in the most recent quarter compared to the preceding quarter is sales growth. These are the only two inputs required for financial modeling to compute sales growth.

Steps to create a Financial Model

1. Previous outcomes and assumptions

2. Start with the income statement

3. Start with a balance sheet

4. Build the supporting schedules

5. Conclude the income statement and balance sheet

6. Create the cash flow statement

7. Perform the Discounted Cash Flow analysis

8. Add sensitivity analysis and scenarios

9. Build charts and graphs

10.  Audit the model

TYPES OF FINANCIAL MODEL

1. Three statement model

2. Discounted Cash flow Model

3. Merger Model

4. Initial public offering model

5. Leveraged buyout Model

6. Consolidation model

7. Sum of parts model

8. Budget model

9. Forecasting model

10. Option pricing model

Skills required in Financial Modeling
ACCOUNTING SKILLS

To create a financial model, students must have a good knowledge of accounting concepts. 

Topics covered are -the matching principle, accruals, revenue recognition, and non-cash items like depreciation and amortisation, among others. 

The candidate needs enough accounting knowledge to be able to interpret financial accounts, analyze them, and reconstruct them.

 EXCEL SKILLS

Strong Excel skills are mandatory for financial modeling. The student needs to know all the main keyboard shortcuts and formulas to save time in building models quickly and to perform calculations and financial analyses.

LINKING THE THREE FINANCIAL STATEMENTS

The student should know how to link all the three financial statements (Cash flows Statement, Income statement, and balance sheet) in excel. 

For instance- connecting net income on the income statement to retained earnings on the balance sheet. 

This skill is hard to master- if the student practices it on regular basis, then it becomes easy. 

FORECASTING SKILL

Forecasting is both an art and a science. Regression analysis allows an analyst to forecast future outcomes based on past outcomes. However, don't let regression science fool you; it still involves making large assumptions about future unknowns.  

PROBLEM-SOLVING SKILL

A good financial analyst can think critically and in a systematic manner. It's essential to follow a significant flow of information when creating a financial model so, that other user can quickly grasp what you've done when they open your Excel file.

ATTENTION TO DETAIL

It is one of the vital skills in financial modeling. If you don't give attention to detailing, you're not likely to be prominent in financial modeling. 

SIMPLIFICATION OF COMPLEX INFORMATION

A person who can create quality financial models has the ability to uproot big complex data into a simple format.

DESIGN SKILLS

Having an eye for design is the most vital skill. A strong financial model is easy to read and understand, with a clear layout, attractive charts and graphs, and a professional appearance. 

PRESENTATION SKILLS

An extensive financial modeler has the ability to create a great pitch book and presentation to represent to clients. 

DETAILS VS HIGH-LEVEL STRATEGY

A skilled analyst has the potential to zoom in on extreme levels of detail in a model and then zoom out on high-level business strategy with ease. Most people are better at one than the other, but a select few have the uncommon ability to excel at both.