Learn How To Become A Financial Modeling Expert And Judge The Quality Of Financial Models Easily

Last updated on April 2nd, 2024 at 03:15 am

Financial modelling is a unique decision-making tool that helps an organisation to correct its path for securing certain desired financial goals within a targeted time. This model is achieved by analysing historical data and other allied information. The entire scope of the job of a Financial Analyst is to evaluate an organisation’s present-day position, make strategic plans and then suggest road maps to the management to help them make decisions to reach their dream goals.

Uses of Financial Models

Financial Modelling Training helps a candidate to prepare recommendations, that are generally related but not limited to the following points – 

1) How the future will unfold for the industry that the organisation is in.

2) How the revenue will increase.

3) How demand for a specific product or a service will increase or go down. 

4) How the capital structure will change.

5) How to maximise the profits in the business. 

6) What are the additional assets required to reach the desired goals or which assets should be discarded? 

The functional areas where Financial Model Analysis becomes handy are – 

1) Future Operational performance (with a focus on break-even units or required no. of employees, operation cost, etc.)

2) Future Financial Performance (with a focus on increase in sales, revenue & profit) 

3) Estimation of Capital expenditure 

4) Funds for future obligations (working capital, equity and debt financing)

5) Free Cash Flow Generation 

6) Future Enterprise Value

7) Ratio Analysis (Profitability / Liquidity / Solvency / Capital Structure Ratio) 

8) Future Business Trends 

9) Stress / Scenario Analysis and many other functions as and when required by the organisation. 

Types of Financial Models

There are many types of Financial Models and they are aimed to predict different future financial parameters of organisations.

1. Three Statement Model – This approach prepares future Profit & Loss, Balance Sheet and Cash Flow Statements of the organisation.
2. Merger Model – This method prepares the future revenue, profit statements, etc. for those organisations which either have resulted in a merger of two other previously existing organisations or other organisations which have made acquisitions in the recent past.
3. Discounted Cash Flow Model – This predicts future cash flow and hence the value of the business i.e. the value per market share. This is used for valuation purposes.
4. Sum of Parts Model – This model is used when dealing with a reasonably large organisation that has multi-business verticals. The process works for each profit centre separately and then sums it up to predict the financial statements for the whole organisation.
5. Leveraged Buyout Model – When a Private Equity firm buys an external business with a lot of debt and then consequently plans to pay out the debt with the help of the cash flow generated from this business and increase revenue, this model is used to predict the financial outcome.
6. Comparable Company Analysis – This model is used by the virtue of studying the data of the competitors of the said organisation. This is also used for valuation purposes.
7. Initial Public Offering Model – This model also helps in future valuation and back calculations to determine the value of the IPO. This is used for valuation.
8. Option Pricing Model – This is a Statistically heavy model using Binomials.   

How to become a Financial Modelling Expert 

A Commerce Graduate may be an ideal aspirant for an expert Finance Analyst. However, as a prerequisite, the candidate needs to learn Microsoft Excel at an advanced level, since this is the tool through which the model will be prepared and presented to the management of the organisation.

There will be quite a few subjects that will be taught in this course. A candidate must learn – 1) to collect financial historical data required into an Excel Sheet 2) to Analyse the data and determine assumptions regarding revenue and cost for the given management goals 3) to Forecast Income Statements 4) to Predict assets and capital expenditure 5) Operation Excellence 6) Sourcing of Funds and 7) Cash Flow Statement and 8) Output or recommendation.    

In this context, it may be noted that the study of financial modelling will add to the skill sets of a prospective candidate and shall be recognized by awarding a certificate at the end of the successful completion of the course. 

Conclusion

The Financial Analyst Course is also taught online by many qualified & experienced professionals in this field. There are quite a few good Indian institutes that have proven track records of mentoring students, who are now professionals in big MNC firms with decent pay packages. The Financial Analysis Prodegree at Imarticus is an online course that will help you to achieve your desired goal.