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Financial Modelling: Navigating Effective Techniques

Posted on by Imarticus Learning

Financial analytics is an inseparable part of businesses and helps company owners make sound and effective economic decisions.

Furthermore, it also helps owners evaluate their company’s performance and make strategies accordingly. One such aspect of financial analytics is financial modelling. 

In this blog, we will explore all about what financial modelling is, what it can be used for, its types, and its benefits. Continue reading to know more! 

What is Financial Modelling?

Financial Analysis course

Financial modelling is the act of creating a thorough summary of an enterprise’s earnings and expenses in the form of a spreadsheet.

Since financial modelling helps companies understand the impact of a future decision or event, it is one of the most helpful and sought-after aspects of financial analysis. 

Financial models are typically prepared based on a company’s historica data and assumptions about future performance. Some of the requirements that should be met in order to successfully create a financial model are cash flow statements, balance sheets, and supporting schedules.

Read More: Financial Modelling & Types Of Financial Models!

What Can Financial Modelling Be Used For?

Essentially, financial modelling is used to make more informed decisions in a company. It can be used to make decisions about the following:

  • Business valuation
  • Forecasting and budgeting
  • Raising capital
  • Organic business growth
  • Acquisitions
  • Financial statement analysis
  • Selling business assets
  • Accounting management
  • Capital allocation

Types of Financial Modelling

Companies use various kinds of financial models based on their needs and requirements. Below, we will discuss 5 such commonly used financial modelling techniques:

  • Three-Statement Model: The three-statement model is the commonest form of financial modelling. In this model, three statements, cash flow, balance sheet, and income statement, are plugged into a spreadsheet and linked with the appropriate formulae to get a dynamic model that can predict future statements.
  • Merger Model: This modelling technique is used to analyse two companies that are planning on merging together. This advanced model helps companies understand the dilution or accretion of a merger.
  • Discounted Cash Flow Model: Simply put, the discounted cash flow model helps estimate the value of an investment by generating projections about how much money that investment will bring in the future. This modelling technique enables business managers and owners to make effective expenditure-related decisions. 
  • Budget Model: Budget models primarily focus on income statements and help business owners set a budget for a specified period based on their current monthly or quarterly figures. 
  • Forecasting Model: This modelling technique is usually a part of budget models. It is used to create a financial forecast that can be compared to the budget model. Both these models combined can help businesses avoid extra expenditures and stay within their pre-determined budget goals. 

Benefits of Financial Modelling

The major benefits of financial modelling are discussed here:

  • Performance Review: Financial modelling helps business owners compare the actual results of the business with the set budget in real-time. Hence, owners get to analyse and rectify any setbacks and, thus, improve their overall performance and increase profits. 
  • Risk Management: Since financial modelling lets business owners know the future impact of any economic decision, it helps significantly minimise the common risks associated with any financial agreement. Furthermore, companies become more aware of potential risks and how to manage them. 
  • Business Valuation: Financial models provide extremely accurate business valuations based on data such as cash flow, net income, and so on. This valuation not only helps business owners understand their worth in the market but also aids in possible restructuring or mergers. 
  • Accurate Budgets and Forecasts: Financial models are based on tangible data and formulae; hence, they provide rather accurate budgets and forecasts. Company owners can use both of these to stay within their financial goals, even while performing well in the market. 
  • Business Growth: Financial modelling helps paint an accurate picture of the economic outcome of any possible project or investment. Hence, owners and managers get a clear understanding of where they should invest money and where they should not. Thus, with more informed decision-making, financial modelling helps businesses reach new heights. 

Conclusion

Financial modelling is a critical aspect of financial analytics that help enterprises understand their current economic situation and also forecast future financial outcomes. Hence, both big and small businesses are eagerly on the lookout for highly qualified and talented financial analysts to join their teams and help their companies grow unparalleled.

In this regard, the Financial Analysis Prodegree offered by Imarticus is the perfect course for individuals who want to seize this demand in the market. The financial analysis course is taught in collaboration with KPMG and includes exciting features like live online training, extensive career support, certification, and so on. The course duration is only 4 months, and by the end of it, you will certainly be a high-performing financial analyst. So, sign up today!

Financial modelling: The breakthrough of the new generation finance trends

Posted on by Imarticus Learning

Imagine a big manufacturing company with all its moving components – a team of administrators, a workforce that manufactures, a crew that procures the necessary raw materials, different units of regulators, marketing department, supply, and distribution chain.

Given the enormity of the company, gaining meaningful insights into its functioning and gauging its efficiency can be a daunting task. This is where financial modeling comes into play, and hence the growing popularity of financial technology courses among the newer generation of finance students.  

To cater to the growing demand of the online fintech program, Imarticus Learning has come up with a Financial Analysis Prodegree in collaboration with KPMG that offers young professionals a 180-hour financial planning and analysis course covering research on equity and valuation, financial modeling, and accounting. This article will give you an elementary understanding of financial modeling and how it will be a breakthrough for the new generation of finance trends. 

What is a financial model?

A financial model is a simple tool that utilizes any built-in spreadsheet software, such as MS Excel, to forecast the financial performance of any business in the future. It relies on the performance history and future performance assumptions to prepare a balance sheet, income, cash flow statements, and supporting schedules.

This dynamically connected financial model is called a ‘Three Statement Model’. It is the base on which we can build more advanced models, like Mergers and Acquisitions (M&A), Leveraged-Buyout (LBO), Discounted Cash Flow Analysis (DCF model), and other types of financial models.

How is a financial model used?

Company executives rely on the financial model to aid them in taking decisions regarding the analysis of the company finances. Some of the significant decisions that are based on such models are: 

  • Making organic business expansions
  • Divesting business units and assets
  • Raising and allocating capital 
  • Making acquisitions
  • Budgeting and forecasting 
  • Management accounting
  • Valuing a business
  • Financial statement analysis

A step-by-step guide of building a financial model

While building a financial model requires lots of relevant data, assessing them and understanding them comprehensively, using financial tools, and auditing and stress-testing. However, a generic but step-by-step breakdown of building a financial model is provided below:

  • Every financial model begins with an in-depth study of the past financial statements and reverse-engineering the data to forecast gross margins, fixed costs, revenue growth rate, fixed costs, among others.
  • The next step is to start an income statement to compute the revenues, operating expenses, gross profit, etc. With that, you can also begin to fill in the balance sheet.
  • The third step compromises building supporting schedules for capital assets like Property, Plant & Equipment (PP&E), and also for interest and debt.
  • Use the reconciliation method to build the cash flow statement by adding depreciation and starting with the net income.
  • After completing the Three Statement Model, perform the Discounted Cash Flow (DCF) analysis by evaluating your business value and calculating free cash flow.
  • Assess the risk of an investment or plan your business accordingly with different assumed scenarios by adding sensitivity analysis.
  • Build graphs and charts of the financial model to communicate the output with the clients.
  • Test your financial model by stress-testing it against extreme scenarios to check whether your model behaves as expected.

Conclusion

Even a cursory understanding of financial modeling will help you understand that it is imperative for most modern business giants. A global pandemic, recession, inflation, and other economic factors have already bolstered the need for financial models to grow businesses. Enroll in the  Financial Analysis course of Imarticus Learning to join the new generation of finance trends.