Why financial modeling is important step by step guide

by Muhammad Ali

What is Financial Modeling and what it’s used for?

Financial modeling is the process of creating a simulation of a real-world financial situations. Financial modeling is one of the most-high valued, but fine understood skill in financial analysis. The main objective of financial modeling is to combine accounting, finance, and business baseline to create a forecast of a company’s future results.

A financial model is a spreadsheet which is usually built in tools like Microsoft Excel, that predicts how a business will perform financially in the future. This prediction is typically based on the company’s past performance and assumptions about the future. It requires creating an income statement, balance sheet, cash flow statement, and supporting schedules, collectively known as a three-statement model.

The main goal of financial modeling is to provide insight results into the financial performance of a business or investment. This involves constructing spreadsheets or using software to create these models.

Types of Financial Models

3-Statement Model
An income statement, balance sheet, cash flow statement, and supporting schedules, collectively known as a three-statement model.

DCF (Discounted cash flow) Model
It is used to estimate the value of a company’s or value of investment by calculating the present value of its expected future cash flows, considering the time value of money. It helps determine how much money it will make and how much it is worth today based on its potential future earnings.

Mergers & Acquisitions Model
It helps us grasp the financial effect of merging two companies together and how much the new company is worth.

Private Equity Model
Private Equity firms use this model to decide if they should invest in a company and how to make that investment successful.

Leveraged Buyout Model
This model helps determine how much money investors can make if they borrow money to buy a company and then sell it later at a higher price.

The Sum of Parts Model
This involves looking at different parts of a company and figuring out how much each is worth separately. Then, you add all the values to see how much the entire company is worth.

Options Pricing Model
This model helps people determine how much money they can make by buying and selling options contracts.

Is Excel the Best Financial Modeling Tool?

Microsoft Excel is great at many things, but it is not purposely built for financial modeling tool. It is just a tool that can be used for financial modeling but not built specifically for financial modeling. There are many software’s in market built specifically for financial modeling like cube software, Anaplan, Oracle, Quantrix, Jirav and many more.

When people think of creating financial models in spreadsheets, they automatically think of Excel. However, you can use Google Sheets for financial modeling tool just like we use excel.

How to Create a Financial Model in Excel step by step

Here is the list of steps that we will follow to create financial modeling in excel.

  1. Study the Company of Your Interest
  2. Download the Annual Report (10K Report)
  3. Populate the Historical Financial Data
  4. Perform Ratio Analysis
  5. Forecast Revenue
  6. Forecast Costs
  7. Build the Working Capital Schedule
  8. Build the Depreciation Schedule
  9. Build the Amortization Schedule
  10. Build the Shareholders’ Equity Schedule
  11. Link and Complete the Cash Flow Statement
  12. Forecast the Debt Schedule
  13. Complete the Missing Links
  14. Balance the Balance Sheet

360 Accountants Financial Modeling services

Our Financial Analysts team can help you make informed business decisions and achieve your financial goals. We offer a range of services, including:

  • Financial Modeling
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  • Budgeting and Forecasting
  • Performance Analysis

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