What is financial modelling?

Financial modelling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.

What is a financial model?

A financial model is simply a tool that’s built in Excel to forecast a business’ financial performance into the future.

The forecast is typically based on the company’s historical performance, assumptions about the future, and requires preparing an income statement, balance sheet, cash flow statement and supporting schedules (known as a 3 statement model).

From there, more advanced types of models can be built such as discounted cash flow analysis (DCF model), leveraged-buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis. Below is an example of financial modelling in Excel.

What is a financial model used for?

The output of a financial model is used for decision making and performing financial analysis, whether inside or outside of the company. Inside a company, executives will use financial models to make decisions about:

1. Raising capital (debt and/or equity)
2. Making acquisitions (businesses and/or assets)
3. Growing the business organically (i.e. opening new stores, entering new markets, etc.)
4. Selling or divesting assets and business units
5. Budgeting and forecasting (planning for the years ahead)
6. Capital allocation (priority of which projects to invest in)
7. Valuing a business

Who builds financial models? (jobs and career)

There are many different types of professionals that build financial models. The most common types of career tracks are investment banking, equity research, corporate development, FP&A, and accounting (due diligence, transaction advisory, valuations, etc).

How can you learn financial modeling?

The best way to learn financial modelling is to practice. It takes years of experience to become an expert at building a financial model and you really have to learn by doing.

Reading equity research reports can be a helpful way to practice, as it gives you something to compare your results to.

One of the best ways to practice is to take a mature company’s historical financials, build a flat-line model into the future, and calculate the net present value per share. This should compare closely to the current share price or the target prices of equity research reports.

It’s also important to establish a solid base understanding by taking professional financial modelling training courses such as ours offered at GEMM Financial Modelling Academy, based in Lagos.

In Conclusion

As a working finance professional, you need Financial Modelling skill. Financial modelling will empower you to acquire skills that will stand you out among your peers.

In this changing times, Financial Modelling opens up new uncharted territories for middle age experienced professionals like you.

THINK YOU ARE NOW READY TO LEARN FINANCIAL MODELLING?
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