Are you aspiring to be a Financial Analyst? Then gaining Financial Modeling skills is a must. But why you may ask. We have answered this question in this article, where we will explore what financial modeling is, its purpose, and its benefits.
There are many benefits to learning financial modeling. It can help you make better decisions about investments, projects, and financial planning. It also helps you understand the risks and rewards associated with different investments.
If you are considering a career in finance, learning financial modeling is important. Financial Planning & Analysis is performed by businesses using these models. Enrolling in a Financial Modeling course will teach you the skills you need to build financial models and perform financial analysis.
This course will teach you different types of financial models like Project Finance Modeling, Equity Research Modeling, and how to build them. Financial modeling is a great way to get started with a top career in finance.
So, without further ado, let’s dive into our topic of discussion.
What is Financial Modeling?
Financial Modeling is the process of creating a spreadsheet representing an organization’s economic standing. The Financial Analyst uses these models for calculating the impact, predicting the future, analyzing trends, and making decisions about investments. Acing this skill allows financial analysts to foresee the business’s stock performance or anticipate executive decisions.
Importance of Financial Modeling
Companies use financial models for a variety of purposes, from evaluating new business opportunities to understanding the drivers of profitability and forecasting future financial performance. The goal of financial modeling is to use historical data to identify relationships and trends that can be used to make informed decisions about the future.
A key part of financial modeling is financial analysis. Financial analysis is the process of reviewing a company’s financial statements to gain insights into its financial health and performance. Financial analysts use financial analysis to identify opportunities and risks, make recommendations, and provide decision support to management.
Use Cases of Financial Modeling
A financial analyst creates a financial model in various scenarios. Some common scenarios include:
- When businesses are planning to expand their territory to new markets or locations
- For making smart budgeting and forecasting decisions while raising capital
- While deciding to allocate capital
- While strategizing to acquire new assets or capital
- Companies use Financial Modeling when they are evaluating the business value
- Analyzing the company’s financial statement
- For Financial Planning & Analysis
Types of Financial Modeling
There are many different types of financial modeling, each with its own purpose. In this section, we have covered 5 common types of Financial Models and their key features.
1. Three-statement Model
As the name suggests, the three-statement model is a combined income statement, balance sheet, and cash flow statement in an Excel sheet with formulae. Financial Analysts use this model to analyze past financial positions and predict the future economic standing of a business.
2. Discounted Cash Flow (DCF) Modeling
In Discounted Cash Flow (DCF) Modeling, Financial Analyst takes the Three-Statement model as a base. Financial Analyst calculates the company’s NPV (net present value) of future cash flows using DCF Model.
3. Merger & Acquisition Model (M&A)
Financial Analysts create the M&A model when companies are planning to merge and acquire a new company. When two companies decide to merge or acquire the other company, the financial analyst creates a consolidated single-tab model of Company A+Company B. This is a sophisticated form of financial modeling.
4. Initial Public Offering (IPO) Model
Financial Analysts create an IPO Model to create a comparable analysis to assess how much investors will be willing to pay for the company’s stock.
5. Consolidated Modeling
By combining three financial statements of various business units into one, Consolidated Modeling provides a complete picture of the company’s finances. The Financial Analyst combines the Income Statement, Balance Sheet, and Cash Flow Statement into one Excel spreadsheet.
Benefits of Learning Financial Modeling
Now that we know what is Financial Modeling and why it is important, let’s check the benefits of Financial Modeling.
- It helps the financial analyst understand the ways a business is operating and the various factors that can impact it.
- A Financial Analyst is able to do the variance analysis by building a Financial Model.
- Businesses use Financial Modeling to evaluate Business Value. This helps them know their worth and helps them make decisions while restructuring.
- Risk assessment and risk minimization are the two most common benefits of building a Financial Model. Financial Analysts can read the model and minimize risk in any business endeavor.
- It also helps in creating more accurate financial budgets and predicting the outcomes of business activity.
- Financial Modeling is helpful for Financial Analysts when suggesting areas for business growth. Financial Analysts read the model and can assess the areas capable of generating high revenue.
So, this was all about learning Financial Modeling, and its types, importance, and benefits. To conclude,
Financial Modeling is an important skill to gain if you are on the path to becoming a Financial Analyst. If you’ve more questions, check out our FAQ (s) section.
What is the career scope after completing the Financial Modeling course?
After you complete the course, you can work as a:
- Financial Analyst
- Financial Manager
- Business Analyst
- Market Research Analyst
- Associate Analyst
- Equity Analyst
How much a Financial Modeling expert earns in India?
The average salary in India is between 4 LPA to 5 LPA.
What skill sets does a Financial Analyst expert possess?
A Financial Analyst is excellent in Excel [formulae, charts, macros, etc.], masters accounting, finance, and valuation concepts, a good manager of time, problem-solving, and a good decision maker.