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Tag: financial modeling

Why Is Chartered Financial Analyst a Good Career Option?

Posted on by Imarticus Learning

In recent times, Chartered Finance Analyst (CFA) is a designation which is quite revered and regarded by most as a key certification for professionals in the areas of portfolio management and research.

The chartered financial analyst program is a certification from the CFA Institute. It is a globally regarded certification. It is essentially a self-study methodology, graduate level program for professionals who want to pursue a career in investment. A person coming out of any discipline or academics can pursue the CFA program.

Applications to the program are usually from students and undergraduates to an early professional who intent to get a boost to their career. Although it is important to note that just getting a certification will not guarantee the same.

Passing all the three exams of CFA in itself is a very daunting job when compared to the efforts and commitment of the time required as against other management programs like the MBA. In fact, there are many MBA pass outs and CA’s who join CFA to get into core investment banking jobs. CFA gives a great technical grounding and offers broad-based scopes suitable for investment banking, research analyst, equity research and portfolio management.

The CFA course focuses on ethics, portfolio management, accounting, corporate finance, fixed income and equity investments, so basically if one does not have a very specific choice but needs to build their career in the field of finance then they should opt for the CFA certification as it is broad-based, opening many career opportunities.

Passing a CFA exam shows that the person pursuing the same has the ability to show commitment, tenacity, comes across as a professional with resilience, and rigour. In addition to the learnings from the course, the charter holders are also considered internationally mobile as well due to their association with the global professional network.



Some of the most common jobs taken by the CFA professionals

Portfolio Management:
Since CFA focuses on essentially training you on portfolio management skills, this job becomes a no-brainer for most pass outs. Under this profile, you are responsible for making financial/investment-based decisions for people who have given the control of their money to you or to your company.

Research Analyst:
Here the profile is responsible for analysing the financial transactions and records of the firm for its clients. Here you need to prepare your observations and reports and primarily have an insight of what the client would want to know about the financial health of the organization in such a way that nothing essential is overlooked before making any strategic decisions.

There are many other nomenclatures for this role within the organization, such as investment analyst, rating analyst, financial analyst, equity analyst, to name a few.

Consultant:
Here the person needs to provide suggestions that will benefit the firm with professional advice. The CFA course covers corporate finance which will assist the professional to make alternative decisions and suggestions to the third party or the client satisfying their requirements.

Accountant/Auditor:
Here you are required to keep a track of all financial footprints and documents of the business or company that you are associated with.

Investment Banking Analyst:
Here a person needs to check all possible pit stops, analyse, evaluate, all possibilities before any investment is made. The person usually is responsible for directing and making the firm aware of mergers and acquisitions. The task can be efficiently performed by any CFA pass out as the course has a section on corporate investment, equity investment, economics and more which prepares them to handle such requirements.

These are just a few opportunities out of the many that you can take advantage of if you wish to pursue the CFA certification.

So to conclude, it is quite obvious that in recent times many organizations and individuals alike are getting highly interested in CFA. The fact that a CFA certification will benefit the organization and the individual in revenue growth and career growth, it is perhaps why most organizations are also considering sending employees usually from the start up a level for this certification as the long-term advantages cannot be ignored.

It is then true to say that the CFA designation does distinguish the charter holders from other counterparts in the eye of professionals and investors. As a successful CFA charter holder has already proved the test of time and their ability and intention of commitment to conducting their professional life according to high professional standards.

How Do You Prepare For A Financial Analyst Intern Interview?

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An internship is an important experience for any student. It helps the student get clarity on what the field is about, and also gives a little experience before a full-time job. If you are a student of finance, internships can help shape your preferences. There are many options when it comes to finance-related internships since finance is the backbone of any business. You can get an edge on recent graduates, based on the internship you choose. Keep in mind the following factors before you apply and sit for a financial analyst intern interview.

Choosing the right company
If you do not have prior work experience, applying for an internship can be difficult at a reputed company. But do not worry. The company will not expect you to demonstrate an expert knowledge. However, they will expect you to know something about the company’s finances and business models. You can prepare for the interview by learning about the company properly beforehand.

Look for company analyst reports, along with the latest quarterly and annual reports. Check for any public information on the company as well, such as press releases and economic news articles. You can also check how the stock has performed in the last year, and whether it is making a profit or not.

Keep a track on the company heads and important financial staff, including the CEO of the company. You can also prepare some questions to ask the interviewer, which can help build a good opinion for you.

Trends in the finance industry
It is important to know about the industry in which you are thinking of making a career. Read up on the latest industry trends. Stay informed on the performance of the company, as compared to its competitors. It may be useful to follow up on the brand image of the company due to its advertisement campaigns. There may be some important technologies or recent trends which the company works on, and are interesting for you.

Mention your experience with the finances and technologies that you may have worked on in the past. Remember companies are always on the lookout for people who fit well into its system. This may help you to land a full-time job after your internship with the same company.

Prepare for the interview
Be ready to explain why you are interested in an internship with the company. You may also be asked why you are interested in a career in finance, about your specific interests, and how the internship can help further your career. Explain how you always have been interested in the field. Talk about stocks and bond markets and their basics. You can also take up a Financial Analyst Course and brush up the relevant concepts.

The financial analyst certification would definitely help you in the long run in your career. You can also check the price of the company’s stock on the day of the interview.

On the day of the interview, make sure to be on time. Preferably, you should reach some time before the interview. Maintain personal grooming and dress accordingly to the dress code that is being followed in the company. Most financial companies have a formal dress code usually but do check with the HR or receptionist before going for the interview. During the interview, try to answer the questions as precisely and directly as possible.

Brief About Financial Modeling

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Brief About Financial Modeling

Financial Modeling, as a career option has recently come into the limelight, as a result of which there is a great increase in the number of finance aspirants, looking to make a career in this field. The skills of financial modelling have become somewhat indispensable when it comes to making a career in the very competitive industry of Finance. Financial Modeling basically refers to drawing up of, a number of models, with the help of tools like MS excel and the likes, in order to protect the financial statements of a particular company. In order to get an entry into this exciting field, a professional is required to have in-depth knowledge about certain concepts such as Financial Accounting, Equity Valuation and MS Excel. While belonging to a background related to Finance, may seem sufficient education qualification, in this highly competitive world, it does not cut it. This is mainly the reason why a lot of professional education institutes are becoming popular by the day. Institutes like Imarticus Learning, which excel in offering tailor-made, industry-endorsed courses in various branches of Finance like, asset management, portfolio management, investment banking as well financial modelling; are soon becoming the go-to choices of a number of Finance aspirants.

Once you have the proper educational qualifications, with a certification in financial modelling, the options are limitless. The various opportunities that can come your way, include that of an Equity Research Analyst, these professionals work quite a lot with financial models before giving out recommendations to their clients. Financial models play a substantial role in Investment Banking as a number of Investment Bankers perform valuations of target companies before they go on to pitch to buyers and sellers. Other fields which have a number of opportunities for those with expertise in financial modelling include Credit Research, Project Finance, Portfolio Investments and so on.

Apart from the job opportunities, there is one more important thing that any Finance enthusiast must know. It is that there are various different types of Financial Models and it is equally important to have expertise in almost all of them. There is Equity Valuation model, which deals with the intrinsic value of the company, which is basically obtained by using a number of valuation methods like Trading comparable, Transaction comparable and so on. Then there is the Leveraged Buyout Model, which basically any substantial debt funding that is supported by a small portion of a company’s own equity. Project Finance Model, consists mainly of capital extensive projects, wherein professionals are expected to build models, which project estimate future revenues, costs, funding structures and so on. Credit Models are basically used in order to evaluate the credit risk, which arises from different business segments, this type of models are used mainly in financial institutions as well as, credit rating agencies. Apart from these said models, there are some other models, which include payroll, equity dilution, mergers and so on. While it is a fact that financial modeling can be easily mastered by someone, from the field of finance. It is also true that anyone who doesn’t belong to the field of finance, but has sufficient interest in the field can also think of making it into a career option.

Confused Between Model Building Approach Historical Simulation? Things To Consider!

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If you consider Basel II, there are two ways of calculating Market Risks VAR:
• Historical Simulation Approach
• Model Building Approach

What makes them different?

Historical Simulation approach is most frequently used by organisations. As the name suggests, we consider daily changes in past/historical values to compute the likelihood of the variations in values of current portfolio between given time frame. The other advanced version of this model places more emphasis on recent observations. The key assumption in historical simulation is that the set of possible future outcomes is fully represented by what occurred in a definite historical time frame/window.

On the other side, model-building approach involves assumptions about the joint probability distributions of the returns on the market variables. This model is also known as variance-covariance approach.

This is more apt for portfolios which has short as well as long positions in their bucket. This consists of commodities, bonds, equities, etc. in the portfolio. Here, the mean and standard deviation are computed from the distribution of the underlying assets returns and the correlation between them.

Daily returns on the investments are normally assumed to be multivariate normal which can be the models biggest drawback. Hence, model-building approach makes it easy to calculate Var.

Model Building approach assumes two things:
• The daily change in the value of a portfolio is linearly related to the daily returns from market variables
• The returns from the market variables are normally distributed

Shortcomings of Historical Simulations
Over reliance on past data can fail to serve the purpose as markets change every moment. The momentum can be gradual or sudden, but does not remain static.

Large number of factors like Technology, regulatory changes, economic conditions, seasonal patterns, etc. influence market and in such scenarios manager who are using historical simulation can face unfavorable situation.

Shortcomings of Model Building Approach
Also this approach is much more complex to use when a portfolio comprises of nonlinear products such as options. It is also a grim task to relax the assumption that returns are normal without a significant increase in totaling time.

When to use? Model building vs. Historical simulation.
Depending on the situation, appropriate model should be adopted by the organisation. While both of them have pros and cons, it is important to list down the objectives of risk model before adopting either of them.

Model building approach producer quicker results and can be used in conjunction with volatility and other correlation procedures.

The advantage of the historical simulation approach is that the joint probability distribution of the market variables is determined by historical data. This approach may not be very complicated however, it is little slow for computation. However, the methodology used in historical simulation is in line the risk factor and does not involve any estimation of variances or covariance’s which are statistical parameters.

One should use historical simulation model only when they have data on all risk factors over a justified historical period if they want the model to depict strong representation of the outcome in future.

To know more about model building join Imarticus Learning’s Financial Modeling Certification Courses, which will help you understanding opportunities in the Investment Banking, Private Equity, Budgeting and Financial Control space.

 

Fundamentals of Forecasting – Basic Modeling Hygiene – III

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By Reshma Krishnan
We are continuing to understand the Fundamentals of Forecasting. Please click here for Part 1 and Part 2.
Many aspiring candidates ask us what is so special about the FMVC program at Imarticus Learning. After all, shouldn’t an MBA suffice? The problem with MBA’s, regardless of which school you go to, is that they don’t teach you role specific issues. For instance, they don’t have specific modeling modules. They will have a forecasting module but they won’t teach you how to model or how to forecast step by step. In the Financial Modelling and Valuation Course (FMVC), India’s leading Forecasting and Financial Modeling program, we teach you the minutae and we go into specifics. One such specific is modeling and forecasting hygiene.
Hard Coding- the model users bane.
This is the first thing I teach in modeling class. Hard Coding is essentially a stand alone number in a cell, which has no back up. It says nothing about the number. You must never hard code a forecasted number because the forecast is always done on the back of an assumption, which has to be modeled in. Hard coded numbers are usually past data, actual data that has been verified and been the result of auditing. A forecasted number should always be a linked number from an assumption.
Colour Coding
Staying with hard coded numbers, it always helps to colour code. In fact, in my class, I mark an assignment zero if it is not colour coded. Red hardcoded number tells me that the forecaster had no option but to hard code. All actuals should be in a different colour to forecasts and all delta numbers, that is the variable you are using to arrive at a forecast needs to also be in a different number.
Give the delta its own cell
Let’s say you want to increase the sale of pencils in 2017 by 10% from 2016. You have two ways to do it.
=(2016 revenue cell) x 10% +(2016 revenue cell) = 2017 revenue.
Or
You create a special cell for 10%
= ((2016 revenue cell) x (10% cell) )+(2016 revenue cell) = 2017 revenue.
Here I am assuming that revenue is growing by 10% . This helps me change the delta as I see fit which then changes my model. The delta is the rational for my model. If you hide it within a formula, I have to constantly look at formulas to find my assumptions.
Learn more about Forecasting by joining our course, FMVC,Financial Modeling and Valuation Course, India’s leading program in Financial Modeling and Valuation and focused on improving your chances on having a career in Investment Banking or Equity Research.

Fundamentals of Forecasting – the Basic Premise of Forecasting – II

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By Reshma Krishnan
We are continuing to understand the Fundamentals of Forecasting. Please click here
The fewer the assumptions, the stronger the forecast – at least in the beginning when you are learning how to model. Most investment Banking models end up running into 40 assumption sheets, each linked to another. While you might believe such minutiae makes a difference, it’s almost always just to make yourself feel better. Yes, your ability to understand every cost element is good, but its futile if your understanding of the industry works or its cost structure is weak. Key assumptions built into the forecast can also be lost, like trees in a forest. Links can be very hard to find. A simple forecast on the other hand helps you understand what drives basic line items while giving you the ability change basic assumptions. So for instance if you are forecasting the cost of a cup of tea, you break the cup of tea into its major elements, milk, tea, sugar. Three basic drivers, but if you decide to link the price of tea not to the retail rate but to an auction rate that is further linked to an auction house pricing, there are many chances your Financial Analyst coursemodel will be faulty for no tangible benefit.

Forecasting is hard- if it wasn’t, financial modeling and forecasting would not be the number one skill required in financial services, especially Equity Research, or the most popular program in Financial Services Education. It requires patience and a deep thorough understanding of the industry. Forecasting is what Equity Research Analysts do all the time which is why Equity Research Analysts are industry specialists. You won’t find an analyst doing both steel and retail e-commerce. If you are not detail oriented, you are not going to be great at forecasting.
Your forecast is as good as your data, or your weakest link- using solid numbers always feels like an attractive proposition. Investment Bankers love to receive solid data from the clients. Equity Research analysts love to receive solid numbers from the industry or a company but what data do you trust. How often do you use that data? Can you remove the bias in the data. Data you receive from clients will almost always be optimistic, same with industry. Data you receive from Private Equity will almost always be pessimistic. There is bias in every data and your job is to remove bias.
Learn more about Forecasting by joining our course, FMVC, Financial Modeling and Valuation Course, India’s leading program in Financial Modeling and Valuation and focused on improving your chances on having a career in Investment Banking or Equity Research.

Investment Banking – Understanding the Deal – The Deal Process (III)

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As we discussed in
Investment Banking- Why do Sellers use an Investment Banker (I)
Investment Banking- Understanding the Deal: The Pitch Process (II)
So now that the banks have pitched for the deal by showcasing their industry knowledge, negotiation and deal prowess and asset valuation, one bank is chosen to exclusively market the asset and execute the deal. The business of developing relationship and signing mandates by going to meetings, researching the industry and pitching is called origination. It is often done by the business development team in large bulge bracket investment banks like Goldman Sachs and JP Morgan. Once the deal has been mandated and a Client Agreement has been signed, the execution team takes over. In a boutique bank like Avendus or Mape, same teams often specializing in an industry handle both origination and execution.
The deal process for buying and selling are slightly different and today we will be focusing on selling an asset. A typical advisory structure.

This is the usual process of a deal
1. Preparation –Diagnostics and Consolidation of information- this is where the execution team visits the site and spends time understanding deal nuances, strategic considerations like potential valuation and transaction process once they look at all the information.
•Review The Business, Financial Results & Prospects
•Develop & Refine Financial Forecast
•Gather Financial & Legal Due Diligence Material
•Analyze Structural Considerations, Including Tax & Accounting Issues
•Review Tactical & Strategic Considerations
•Analyze Structural & Timing Considerations
• Create deal Collateral including Information Memorandum, Financial Model and Teaser
2. Planning– Establish Valuation Based On Standard Valuation Techniques
a. Review Strategic Options In Light Of Valuation & Structural Goals
b. Analyze Transaction Structure Alternatives
c. Assist In Development Of Appropriate Acquisition Contract
3. Marketing– Use deal collateral and contacts to
a. Position Company To Appeal To Specific Buyers
b. Identify & Screen Potential Buyers
c. Prepare Management Presentation
d. Develop Data Room and coordinate site visits
e. Conduct Marketing Process With Strict Time Guidelines
f. Minimize Business Disruption
4. Due Diligence and Bid Evaluation–
a. Compare & Analyze Bids & Considerations
b. Evaluate Company’s Options
c. Due Diligence by Buyers
d. Analyze Tax & Structural Impact Of Proposed Transaction
5. Negotiation- Negotiate pricing through auction rounds. There are different ways in which you sell or buy a company (See box below) but all of it involves a fair amount of negotiation and many rounds of it. A couple before the due diligence and a few after.

a. Negotiate Price
b. Negotiate terms of sale or SHA and SPA terms
c. Negotiate R & W terms
6. Documentation and closure- A primary legal process but also important for bankers as they coordinate everything. This is one of the reasons why bankers wear many hats. A salesperson, a lawyer, an accountant and sometimes even the local errand boy.
Every part of this process is delved into in detail in FMVC and Diploma in Corporate Finance, India’s leading programs in Financial Modelling and Corporate Finance.

 

Investment Banking – Why do Sellers use an Investment Banker? (I)

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If you looked at the economic times headlines today, you would have read how the Government has shortlisted three Investment Banks, also known as Merchant Banks, to manage the stake sale in the SUUTI portfolio companies. (Source)
This means the government has mandated Citibank, Morgan Stanley, and ICICI Securities, to sell their minority stakes in various listed and unlisted entities on their behalf. What does this mean? And how would the transaction take place? In this post and the next series of posts, we will try and understand how a deal takes place, what happens and what Investment Bankers actually do. These posts will help you prepare for Investment Banking and Corporate Finance interviews as this is a common question. This is part of our interview prep module in our FMVC course at Imarticus Learning, one of India’s leading Financial Modeling and Valuation courses.
Why do they need a banker at all?
I mean after all who knows your company best, you or an outsider. You, of course. And why should you really pay 4 percent of what you get to someone when you could do it yourself. Well Investment Bankers add immense value to a deal and this is why most major transactions use one.

  1. Most companies don’t have the expertise– Investment Bankers bring with them specialized knowledge on how to sell something. How to package a product in a way that showcases it best to optimize value. But how do they know the company well enough to do that? Well, they work very hard to gain both a broad working knowledge of the industry and specific knowledge about the sector. So yes, while you know your company very well, they probably know the industry, your competition, both domestic and international as well as you do and perhaps even better in some cases.
  2. Most companies don’t have the time– Are you going to focus on running the company or selling it. Selling a business is an extremely time consuming process from gathering all the information, to putting it together in one place, to contacting buyers, scheduling meetings, doing site visits and taking care of documentation. It’s also an important job; you can’t just put your EA on it, however good she might be. So do you pull your most efficient person out of their current job, or are you better off hiring someone who does this day in and day out?
  3. Being objective– Value is a very subjective thing. You might believe your company is work x but the market and the buyers might value it at Y.  Because you are too close to the transaction, sellers find it very hard to take an objective view because the value of a company is marred by conflicts and emotions. Yes, finance is a minefield of aspirations, attachments, ambitions, hard work, years of toil and legacy. Less said about inflated egos the better. So having a banker that can assess value from the outside is not just helpful but critical in achieving your objective.

 

Financial Modeling: Predictive Power And Limitations

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Financial Modeling: Predictive Power And Limitations

As another IFAP batch comes to a close and yet another begins, we look back on some of the more technical aspects of the Financial Analysis course. Along with intermediate and advanced excel sessions, which cover Goal Seek, V look up and Macros, Financial Modeling is one of our key technical classes and a unique elements of the Imarticus Financial Analyst Program.
Analysts throw around the word ‘Financial Modeling’ a lot. You ask them what they’re doing as they are buried deep in music and excel sheets and they respond – I’m building a model. You go – huh?  Is it forecasting; is it inputting data?

 

What is Financial Modeling?

Here’s my definition adapted from the one Wikipedia gives you. Financial Modeling is the process of building an abstract representation that simulates the variability and outcome of a real life financial situation.
Let’s break the definitions down. What do you mean by abstract? We are not talking about Paul Klee here but a summary representation of a situation or a transaction. We are summarizing a financial situation into an excel sheet and creating enough sensitivities and variables within that sheet to simulate outcomes which will help us arrive at a solution – more often an answer to the question. Should I invest? Should I merge? Should I make? Should I buy?

Financial models vary in complexity and can be anything from a single sheet DCF calculation to a complex derivative valuation or leveraged buyout model.

In the fields of accounting, finance and valuation, models are used in the areas of business valuation, especially discounted cash flow, but including other valuation problems; Scenario planning and management decision making (“what is”; “what if”; “what has to be  done”); Capital budgeting; Cost of capital (i.e. WACC) calculations; financial statement analysis (including of operating- and finance leases, and R&D); Project finance; and of course Mergers and Acquisitions (i.e. estimating the future performance of combined entities)

Effectiveness of Financial Modeling

The effectiveness of a financial model can be distilled into three major elements:
Quality of input data – If the base historical data used to anchor forecasts is incorrect, it is obviously going to lead to misleading answers
Assumptions/drivers used to forecast information – Understanding the dynamics of businesses or products is critical to building assumptions. For instance, if you want to understand the viability of the car business, it’s important to understand population growth and perhaps the trend of family car ratios and built-in flexibility to see what would happen if ratios changed.
Model design and hygiene – Even if your data is perfect and your assumptions are spots on, your model fails if it’s cumbersome and clumsy. For instance, hard-coded cells need to be a different colour from formulae cells.

Once IFAP students learn how to analyze base data in Level 1, and Value in Level 2, they are taught the basics of building assumptions and understanding business drivers through a variety of Corporate Strategy frameworks.

During the technical class they are taken through models and taught model design and hygiene, assumption worksheet design.

Limitations of financial models

While robust models help to understand possible outcomes by building in drivers we know, it fails to build in the unexpected. A great example of this was the 2008 crisis where no model seemed to take into consideration what would happen if housing prices fell. It was an assumption that housing and land appreciate, forever and ever.

Two, no manager should rely on a model without considering the subjective elements that go into any transaction. It’s hard to model behaviour. So the synergy model we built for an M&A transaction takes no consideration of integration issues, leading to the overvaluation of an asset.
Finally, Confucius did say, ‘Study the past if you would define the future, history has shown us that it is not a guarantee, so while a robust financial model can greatly help simulate possible outcomes helping us arrive at a conclusion, it cannot be the sole factor on which a decision is made.