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Financial Modelling Notes

Financial modeling is the process of creating a mathematical representation of a company's financial performance, primarily used for budgeting, forecasting, and decision-making. The process involves understanding financial statements, defining assumptions, building and validating a model, and using it for analysis. There are three main types of financial models: forecasting, reporting, and decision-making models, each serving distinct purposes in financial analysis.

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14 views3 pages

Financial Modelling Notes

Financial modeling is the process of creating a mathematical representation of a company's financial performance, primarily used for budgeting, forecasting, and decision-making. The process involves understanding financial statements, defining assumptions, building and validating a model, and using it for analysis. There are three main types of financial models: forecasting, reporting, and decision-making models, each serving distinct purposes in financial analysis.

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raghavtoshniwal27
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Financial Modelling

Financial modeling is the process of creating a summary of a company's expenses and


earnings in the form of a spreadsheet that can be used to calculate the impact of a future
event or decision.
A financial model has many uses for company executives. Financial analysts most often use it
to analyze and anticipate how a company's stock performance might be affected by future
events or executive decisions.
Financial modeling is the process of creating a mathematical representation of a company’s
financial performance. It’s a valuable skill for anyone interested in finance, accounting, or
business, and can be used for a wide range of tasks, including budgeting, forecasting,
valuation, and decision-making.

Here are some steps to get started with financial modeling:


1. Understand the basics of financial statements: Financial modeling starts with a
solid understanding of financial statements, which are the primary source of data for a
financial model. The three main financial statements are the income statement,
balance sheet, and cash flow statement.
2. Choose a scenario: To start building a financial model, you’ll need to choose a
scenario to model. This could be anything from a startup business to a mature
company with a complex business model.
3. Define assumptions: Once you have your scenario, you’ll need to define the
assumptions that will drive your model. These can include revenue growth rates,
operating expenses, capital expenditures, and working capital requirements.
4. Create a model: Using spreadsheet software like Excel, create a model that
incorporates your assumptions and produces financial statements based on those
assumptions. Start with a simple model and gradually add complexity as you become
more comfortable with the process.
5. Validate your model: Once you have a model, it’s important to validate it by
comparing it to actual financial results. This will help you identify any errors or
inconsistencies in your model and refine your assumptions.
6. Use your model for analysis: Once you have a validated model, you can use it for a
wide range of analysis, including budgeting, forecasting, valuation, and decision-
making.
Process of creating a financial Model
The financial modeling process can be broken down into several steps. Here’s a jumpstart
guide to help you get started:
1. Define the purpose of the model: Before you begin building a financial model, it’s
important to define the purpose of the model. Are you building a model to evaluate
the financial feasibility of a new project, to analyze the financial performance of an
existing company, or for some other purpose? This will help you determine the inputs
and outputs of your model.
2. Gather data: Once you have a clear purpose for your model, you’ll need to gather the
data that will drive your model. This can include historical financial statements,
industry benchmarks, economic data, and other relevant information.
3. Identify key assumptions: Based on the purpose of your model and the data you’ve
gathered, you’ll need to identify the key assumptions that will drive your model.
These can include revenue growth rates, cost of goods sold, operating expenses,
capital expenditures, and working capital requirements.
4. Build the model: Using spreadsheet software like Excel, start building your financial
model by inputting your assumptions and creating formulas to generate financial
statements. It’s a good idea to start with a simple model and gradually add complexity
as you become more comfortable with the process.
5. Test and validate the model: Once you have a model, it’s important to test and
validate it by comparing it to historical financial results or other benchmarks. This
will help you identify any errors or inconsistencies in your model and refine your
assumptions.
6. Use the model for analysis: Once you have a validated model, you can use it for a
wide range of analysis, including scenario analysis, sensitivity analysis, and decision-
making.
7. Review and update the model: Financial models should be reviewed and updated
regularly to ensure that they remain relevant and accurate. It’s a good idea to review
your model at least once a year, or whenever there are significant changes to your
business or industry.
Model Types
There are three primary types of financial models:
1. Financial forecasting model — Used to make a financial projection for a period of time,
usually by month, for a fiscal year.
2. Financial reporting model — Used to compare actual financial results to a forecast.
3. Financial decision-making model — Used to analyze potential investment and business
opportunities.

Once you have identified the model requirements and model type, the next step is to identify
the model components.
Financial forecasting model —This type of model typically involves the forecasting of sales
revenue and expenses, so it's important that you have sections in the model dedicated to those
activities as well as a summary tab.
Financial reporting model — Usually already has a financial forecast in the file and
requires you to import external data in order to compare actual results to forecast. You'll need
a data import section, analysis section, and reporting/dashboard section.
Financial decision-making model — This is probably the most complex model type. It
generally will include a financial forecast, financing/loan assumptions and payments, a
section that includes the investment assumptions, as well as a section that includes various
investment metrics that result from those assumptions.

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