Financial Modeling for Beginners | What is financial modeling ?

What is financial modelling

Financial modeling is one of the most deeply valued but easily understood skills in finance. The main objective is to combine accounting, finance, and business metrics to create an ideal representation of a company in Excel, forecasted into the future. This model to financial modeling for beginners and “figure” will teach you all the basics a beginner needs to know!
In other words, Financial Modelling is the process to make Financial Statement projections with the help of assumptions. Any model which does not include the projections of There are many types of financial models with a vast range of uses cover: making business outcome at a company, making investments in a private or goverment company, value securities, or undergoing a corporate transaction such as a merger, acquisition, divestiture, or capital raise. This financial modeling teacher is designed to teach you the basics.

Why do you use Excel?:

Forecasting a company’s action into the future can be very complex. Each business is unique and requires a very specific set of assumptions and calculations. Excel is used because it is the most flexible and customizable tools available. Software, as an alternative, can be too rigid and don’t let you understand each edge of the business the way Excel does.

What are the steps for building a financial model? :

In this financial modeling for beginners and “figure” guide, we have set out the basic steps of how to build a financial model.
Actual data – input at least 3 years of historical financial data for the business. Ratios & metrics – calculate the actual ratios/metrics for the business such as margins, growth rates, asset turnover, inventory changes etc. Acceptance – continue building the ratios and metrics into the future by making assumptions about what future margins, hike rates, asset turnover, and fund changes will be going forward.
Forecast – forecast the income statement, balance sheet, and cash flow statement into the future by shift all the calculations you used to calculate historical ratios & metrics. In other words, use the assumptions you made to fill in the financial statements. Valuation – after the forecast is built, the company can be valued using the Discounted Cash Flow (DCF) analysis method. Learn more about DCF models and valuation.

Who builds financial models? :

There are many professions and career paths that require financial modeling. Here are some of the most common ones:
  1. Investment Banking Analysts & Associates
  2. Equity Research Analysts & Associates
  3. Private Equity Analysts & Associates
  4. Credit Analysts
  5. FP&A Analysts & Managers
  6. Corporate Development Analysts & Managers

How much accounting knowledge is required? :

In form to build a financial model, you need a strong understanding of accounting fundamentals. You have to know what all the differnt accounts mean, how to calculate them, and how they’re connected. We endourse having at least a few accounting courses under your strap. Since accounting is a essential for financial modeling, we offer our accounting crash courses for free!

What Excel skills are required? :

There are many Excel formulas and functions needed to build a financial model. Here are a few of the most common ones:
  1. SUM Function adds up a set of numbers.
  2. AVERAGE Function calculates the average of a set of numbers.
  3. COUNT Function counts the number of cells that consist of numbers
  4. MIN and MAX Function calculate the minimum and maximum of a set of values.
  5. SUMPRODUCT Function multiplies two sets of arrays and adds the totals.
  6. IF Function is a logic-based formula that can make your model more dynamic.
  7. Charts & Graphs are an important part of financial modeling.
  8. Formatting skills can help separate great from good models.

More Excel resources :

  1. List of Excel Shortcuts
  2. Excel formulas and functions
  3. Excel Guide for beginners
  4. Excel Online Course

What are the trademarks of a good financial model? :

When building a model it’s important to follow best practices, which we draft in our courses. A good model is simple enough that anyone can understand it, yet detailed enough to shaft complex situations. Here is a list of broad best practices for building models in Excel:
  1. Well-structured with a good layout
  2. Easy to follow and understand
  3. Drivers and assumptions clearly set out
  4. Simplicity over complexity
  5. Accurate
  6. Focus on important issues
  7. Visual outputs

Thanks for reading our guide to financial modeling for beginners (and “figure”). For more advanced guidence, please see IB Institute financial modeling courses.

How to get a job in financial modeling?:

There are a vast range of corporate finance jobs that require financial modeling skills. If you’re interested in financial planning & analysis (FP&A), equity research, investment banking, private equity or corporate development, explore IB Institute CAREER MAP to find the best job in financial Modelling for you.

More resources beyond financial modeling for beginners:

TAt IBI we spend a lot of time building Excel models, and therefore have a lot of valuable free assest to share with you. Here are some of our most helpful resources in addition to this “figure guide” to financial modeling:
  1. What is financial modeling?
  2. How to become a financial analyst
  3. Valuation methods
  4. DCF model guide
  5. Financial modeling courses
  6. Excel training

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