What is Financial Modelling?

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What is Financial Modelling

Creating a summary of the expenses and revenues incurred in the functioning of a business enterprise, Financial Modelling as a process aims to assess the company’s present financial expenses and profits to predict the impact of any future event and thus helps in facilitating better finance-related decisions. To ensure proper financial management in any business firm, financial modelling plays a crucial role as it gives an overview of what future expenses and revenues will be like. As it is increasingly applied across various industries and businesses, there are numerous Financial modelling courses available for those interested in learning the intricacies of this process. This blog elaborates more upon what is Financial Modelling, its types, applications, courses available as well as career scope!

What is Financial Modelling?

In simple terms, Financial Modelling can be explained as the process of creating a detailed summary of a business firm’s expenses as well as revenues in a spreadsheet format to help the financial managers make better decisions for the future. It gives a comprehensive overview of the expenditure and revenues earned by the company along with providing the sources where most resources are spent as well as where the profits came from. The final observations and reports of the analysis are then utilised by Financial Analysts for different purposes, be it assessing the firm’s stock performance and its impact on the future or for making decisions regarding financial management.

Financial Modeling
Courtesy: Corporate Finance Institute

Why Study Financial Modelling?

Post knowing what is Financial Modelling, let’s now understand the need to study Financial Modelling. Enlisted below are some of the prominent reasons why you should learn it.

  • It enables you to comprehend the foundations of a firm.
  • In other words, the inner workings of any firm or client will become immediately clear to you – their income, customer acquisitions, financial statement balance sheet, and so on.
  • As you move up the financial professional ladder, it has become one of the most important talents to have.
  • In fact, nearly all financial jobs in the corporate sector today require this expertise. It will be a significant oversight on your behalf if you are unaware of it. However, mastering it will open up numerous opportunities for you.
  • In actuality, there are fewer people than you think who are capable of performing investing analysis. There are even fewer people who have mastered this talent. This is one of the reasons why Financial Modelling is so popular. This is a difficult talent to grasp and takes years to perfect. 

Who Should Study Financial Modeling?

One of the most asked questions after what is Financial Modelling is who should be studying Financial Modelling? Financial Modelling may be useful and should be considered by the great majority of individuals such as: 

  • Anyone who wants to learn about finance and get involved in financial decision making can complete the Financial Modeling course. These individuals might be Executives, Business Planners, Strategy Decision Makers, Managers working with Banks, Equity Researchers, Project Managers, Research Analysts, Investment, and others who operate in the finance department of various businesses.
  • It is a benefit for individuals seeking CA (Chartered Accountant), MBA (Masters of Business Administration), CFA (Chartered Financial Analyst), FRM (Financial Risk Manager), and other commerce graduates.
  • Financial Modelling is also appropriate for applicants with a degree or diploma in technical disciplines such as B.Tech or Engineering who wish to pursue a career in finance.

Types of Financial Models

Now that you are aware of the salient features of what is Financial Modelling, you must also know that there are different types of financial models used for this process. Financial Models can shift in form and intricacy depending on the reason for which they are built. It tends to be a one-sheet model for short-term analysis, else it may be a multi-sheet, multi exercise workbook model with a few cross-connections for an organization or an industry. Here are the major types of Financial Models:

Valuation-utilizing DCF 

Discounted Cash Flow (DCF) is one of the most widely recognized strategies for business valuation. DCF analysis gives the aftereffect of an organization’s present worth, known as “net present worth,” by anticipating its future free incomes. Its capacities on the rule that the estimation of a business is the aggregate of its anticipated future free incomes, limited at an appropriate rate. When it comes to Financial Modelling, this type of model is widely used in equity research and capital markets.

Leveraged Buyout Model (LBO) 

In a leveraged buyout, a firm is acquired on the sole basis of debt and for this financial model, complex debt schedules are created. It is majorly used in private equity and investment banking and is amongst the most layered Financial Models as there are many circular references as well as cash flow materials are needed.

Merger or M&A model 

As the name suggests, this Financial Model is utilised for mergers and acquisitions. The whole goal of merger model is to comprehend the effect of securing to the acquirer’s EPS and how the new EPS contrasts and the current one. If the new EPS being higher, the exchange is classified “accretive” while the contrary situation would be named as “dilutive”. 

Apart from these, here are the other types of Financial Models:

  • 3 Statement Model
  • Forecasting Model
  • Option Pricing Model
  • Sum of the Parts Model
  • IPO Model
  • Budget Model
  • Consolidation Model

Applications of Financial Modelling

The process of Financial Modelling has an immense scope across different types of businesses and is vastly used. Some of the prominent areas where Financial Modelling is applied are explained below:

Venture Banking/Equity Research

Financial Modeling proves to be incredibly useful for business valuation. Investment brokers use it for M&A and fundraising exchanges. Value Analysts use it to estimate stocks and provide purchase/sell/hold suggestions. 

Task Finance/Credit Rating 

Financial modelling assists bankers and credit experts to calculate future incomes and costs to assess an undertaking’s practicality. This way, they are able to choose if they ought to expand the loan or what the credit assessment of a venture or organization ought to be. 

Corporate Finance 

The financial models are also incorporated by organizations to evaluate their funds and undertakings. It is henceforth a contribution to making subsidizing plans for corporate undertakings. 

Entrepreneurs and Small Businesses

Small businesses and start ups also utilize Financial Modelling to assess their timely expenses and revenues and thus strategize for the long run accordingly. It actually works as a significant tool for maintaining a strategic distance from possible dangers. 

If you want to pursue your career in financial Modelling, then there are various options. The course duration may vary according to the university. Let’s find out some of the best Financial Modelling courses that you can pursue and consider to kickstart your career in the same field of study: 

Certification Courses

Diploma Courses 

  • Diploma in Financial Modelling
  • PG Diploma in Financial Modelling
  • Diploma in Applied Finance
  • Diploma in Statistics and Finance
  • Diploma in Quantitative Finance and Econometrics
  • Diploma in International finance 
  • Diploma in Financial Analysis 
  • Diploma in Finance and Investment Analysis

Bachelor’s Courses 

Master’s Courses

  • MBA in Finance
  • Master’s in Actuarial and Financial Science
  • Masters in Financial Engineering
  • Master of Commerce (MCom)
  • MSc/ Master of Finance
  • MSc in Accounts, Finance and Regulations
  • MSc in Financial Mathematics
  • MSc Corporate Finance
  • Masters in Advanced Finance
  • MCom in Statistics Studies
  • Masters in Venture Capital and Private Equity

Here is a list of Short Term Courses in Finance available online for those interested in learning Financial Modelling:

Course Name  Link 
Business and Financial Modeling Specialization by Wharton School  Coursera 
Excel Skills for Business Specialization by Macquarie University Coursera 
Business Statistics and Analysis Specialization by Rice University Coursera 
Financial Modeling for Startups & Small Businesses Udemy 
The Real Estate Financial Modeling Bootcamp  Udemy 
Corporate Finance: Robust Financial Modeling Linkedin 
Financial Modeling Course Proschool
Real Estate Financial Modeling  Wall Street Prep
The Investment Banker Financial Edge

Top Universities 

There are numerous universities across the world that offer a wide range of courses in Financial Modelling and Financial Management. Check out the top universities you must consider for pursuing a program in this field:

Skills Required

After becoming well-versed about what is Financial Modelling, its types use, top universities, it’s now time to discuss certain skills that must be required in order to pursue a career in the same field. 

  • Advanced Excel skills
  • Solid knowledge of Accounting standards, and Finance
  • Knowing how to build a forecast
  • Problem-solving skills 
  • Presentation skills 
  • Analytical skills 
  • Attention to detail 
  • The ability to think about high-level strategies
  • Good communication skills 
Courtesy: Corporate Finance Institute

Career Scope

Financial modelling is a growing field of commerce with various job opportunities along with promising salary packages. Some of the major career prospects in this field are:

  • Financial Analyst
  • Business Analyst
  • Junior Research Analyst
  • Merger and Acquisition Associate
  • Investment Banking Associate
  • Financial Planning & Analysis – Junior Manager
  • Equity Research Associate
  • Debt Syndication-Junior Executive

Users of Financial Modelling

Financial Modelling is used by 6 distinct groups of users that are listed down below: 

  1. Governments
  2. Universities
  3. Business owners and entrepreneurs
  4. Finance and Accounting professionals
  5. Financial Modelers and Consultants
  6. Individuals for personal finance

FAQs

What is a Financial Model?

A financial model is any tool used to compute, forecast, or estimate financial data. As a result, models can range from basic formulas to sophisticated computer programmes that might take hours to operate. Financial models, in short, are mathematical models in which variables are connected together to depict a simplified version of the performance of a financial asset or portfolio of the company, project, or other assets.

Where can you use Financial Models?

Financial Modelling can be used in:

Company Valuation
Risk Management
Asset Valuation
Mergers and Acquisition
Budgeting & Forecasting
Option Pricing
Raising Capital
Allocation of Capital
Quantify and predict risk
Portfolio performance
Identify undervalued securities

Is Financial Modelling done in Excel? And if so, why?

Yes. It is typically done in Excel, although it is not the only programme available for creating models. It is not the only tool you’ll be required to use. In reality, there are more advanced software tools available that might assist you in creating the models faster and with fewer mistakes. C++, Alight, Synario, and Quantrix are some examples.

Is financial Modelling difficult?

It takes more effort to learn financial modelling on your own. While there are free lessons accessible on complex Excel operations and accounting concepts, you’ll usually have to do some digging to locate relevant videos or materials, and it can be tough to build abilities on one another as you learn.

Hence, we hope that this blog has provided you with all the details regarding Financial Modelling! Planning to pursue a degree in Finance? Our Leverage Edu experts are here to help you explore the best courses and universities as per your interests and preferences! Sign up for a free session with us today!

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