Financial modeling involves preparing a summary of the revenues and expenses incurred during routine business functioning.
It helps assess the company’s current financial profits and expenses and predict the outcome of any future event. Hence using financial modeling, it is easier to make better financial decisions.
For an enterprise’s excellent financial management, financial modeling is imperative. It gives a perspective of what potential expenses and revenues would be like in the future.
Since, today, financial modeling is widely applied across businesses and industries, you can find a variety of financial modeling certification courses on the internet.
Hence, anyone interested in learning the intricacies can take them up. Through this guide, we will discuss the different aspects of financial modeling.
What Is Financial Modeling?
Financial modeling is the backbone of any business. It helps the company’s finance team with significant business decisions in the corporate world.
These are quintessential to assist enterprises in deciding between the available choices to get to the desired solutions.
Financial modeling can advise you on the degree of risk associated with any particular financial decision you wish to implement.
Further, financial modeling can also help devise a well-defined financial statement to reflect the operations and finances of the company. Consequently, businesses can make financial decisions more confidently.
How To Become A Financial Modeling Expert?
Naturally, if you are studying financial modeling, your primary instinct would be to understand the tips and tricks to be a financial modeling expert.
Further, you would also be interested in knowing the skills employers look for when hiring financial modeling experts.
To be adept at financial modeling, one of the best plausible ways is taking a certification in Financial Modeling.
You can find the best course suggestions on TangoLearn to help you get started. Ideally, you must sign for a financial modeling study class like CFI’s Financial Modeling & Valuation Program.
Such classes can help you develop a valuable insight into handling financial matters to manage the company’s financial decisions.
Further, being well-versed in the subject betters your chances of landing a higher-level position as a business analyst, audit manager, group manager, or finance manager.
Moreover, the subject deals with quantitative finance applications. So, now we will discuss some of the skills you must possess if you aspire to make a career in financial modeling.
Beginner Level
If you are starting in the field, and seeking entry-level jobs, here are some skills you must possess:
1. Knowledge of ratio analysis
2. Preparing and studying financial statement
3. Finance-related problem-solving abilities
4. High-level analytical skills
5. Hands-on experience in MS Excel
6. Good verbal and written communication skills
7. Knowledge of preparing flexible charts
8. Understanding of financial forecasting
9. Experience in accounting
10. Ability to curate financial statements
11. Creating and understanding financial model templates
12. Fundamental clarity of the financial market
13. Familiarity with assets like the stock market and mutual funds
Intermediate-level
Progressing the beginner level, if you aspire to climb further on the corporate ladder, here are some skills you must possess to land a well-paying job. Please remember these skills are in addition to beginner-level skills.
1. Creating financial statements in Excel
2. Analyzing the financial statements
3. Making financial models
4. Knowledge of credit ratings and appraisals
5. Understanding financial modeling and the difference between financial modeling and other business models
6. Breaking the circulation loops in Macro
Advanced-level
If you wish to land a senior position in the field, you need advanced-level skills. Please remember these skills are in addition to the beginner and intermediate-level skills. Below we will list all the necessary skills:
1. Building the assumptions – takeover premium, synergies, etc.
2. Developing the skills to estimate merger transaction valuation
3. Performing valuation with comparable analysis and discounted cash flow (DCF)
4. Knowledge of charts – Waterfall charts, Gantt Charts, Radar Charts, Football Field Charts, etc.
Financial Modeling Applications
Here is a list of some places where financial modeling finds heavy use.
1. Credit Rating Or Project Finance
Financial modeling can help credit analysts and banks project future costs and revenues to make an informed judgment about the viability of a project.
Based on this decision, credit analysts can decide whether to extend loans. In addition, it also aids in assigning the credit rating of the company or a project.
2. Equity Research Or Investment Banking
Financial modeling is the fundamental tool necessary to perform financial valuations and analyses.
For an equity analyst, financial modeling can help in stock valuation, and arriving at recommendations to hold, sell, or buy stocks.
Investment bankers can use financial modeling to arrive at valuations in fundraising transactions and Mergers and Acquisitions.
3. Entrepreneurs Or Private Equity
Entrepreneurs employ financial models to showcase their plans to potential investors. It aids in formulating financial strategies. Performing several simulations can prove to be a vital tool in preventing risks.
4. Corporate Finance
Lastly, companies also use financial modeling to assess their projects and finances. Therefore, you can use it to prepare funding plans for corporate projects.
Benefits Of Financial Modeling
Here is a list of benefits of financial modeling.
1. Financial Modeling Helps Avoid Financial Losses.
With financial modeling, you have an instant answer to a project that may take weeks, months, or years to complete. Hence, it helps companies make better financial decisions.
2. Financial Modeling Helps In Risk Management.
Companies can significantly lower their financial risks by employing financial models for project evaluation. It helps the entrepreneurs foresee the outcome of their actions.
Hence, using financial modeling, the corporates can modify their marketing campaigns, the price changes, and the cost of entering a new niche market.
3. Financial Modeling Helps In Creating Monthly Estimates.
You can also use financial modeling to create monthly estimates of the predicted performance vs. the actual performance. It can help in deciding the budgets.
4. Financial Modeling Helps Ensure Consistent Results.
Lastly, financial modeling ensures that the business sees consistent results. For instance, A business aspires to increase capital to expand. So, they have to take a loan for the same.
Now, financial modeling can assist the company owner in deciding whether they must opt for financing now or a decade later. The risks associated with the loan will primarily be constant.
