course bg
EduPristine>Blog>7 Lessons Every Financial Modeler Must Know

7 Lessons Every Financial Modeler Must Know

February 4, 2014

When was the last time that you decided to cut a slice of the Financial Modeling cake and give it a try? Well, I have and I can tell you it is absolutely delicious! Financial Modeling is one those fields that will engage you, prompt you to think very hard and find a brilliant solution. There are so many aspects to Financial Modeling that it can make one think hard and long about its immensity and helpfulness.

The number of times it has helped me at work is unbelievable and rather incredible! To me, financial modeling is understood to mean an exercise in either asset pricing or corporate finance, of a quantitative nature. In other words, financial modeling is about translating a set of hypotheses about the behavior of markets or agents into numerical predictions; for example, a firm’s decisions about investments or investment returns.

Financial Modeling covers many different aspects from various angles. It is advisable for those in the field of finance to be absolutely learned in these methods, techniques, notions and concepts.

Let us tell you a bit more about 7 assured methods and concepts that would guarantee you professional success!

Lesson 1 – Revenue Drivers:

Everyone in the finance field must know how to identify Revenue Drivers in financial models. It is frequently used by corporate firms. A major concern that one comes across in almost every financial modeling exercise leading to valuation, is how to estimate the revenue drivers of the company that is being modeled for. This question is also raised by analysts, industrialists and business owners.

Lesson 2 – Tax Modeling:

Tax Modeling, something that would ordinarily seem difficult, is actually quite simple and would help all. Whether it is an entrepreneur or an MNC or any individual, everyone is required to pay taxes. The intricacies of Tax Modeling are great and require understanding of certain basics. The tax rate, MAT, PBT are all different aspects of Tax Modeling that every responsible citizen must know about. Obviously, it would differ from one geographical location to another. Read on and see if you know about all the ideas and methodologies involved in Tax Modeling and Tax calculation!

Lesson 3 – Uses of Excel:

Microsoft Excel, a tool that is used by millions all around the world, have a few features that not too many people know about. For instance, the NPV and XNPV functions. Do you know about those? Or the ROUNDUP function in Excel? I didn’t till I read about it on EduPristine’s page! If you want to know more, read on to find out more about the Value of Excel in every financier’s work.

Lesson 4 – Concept of Terminal Value:

I remember those days when I used to shrug off practicing and understanding some basic concepts related to cash flows. Now, I now realize the importance of concepts such as Terminal Value. In the field of finance, all these concepts are of prime importance. Before it is too late, you should read and learn about it.

Every business venture involves a certain amount of risk. We invest money in the venture hoping that at some point, our efforts and investments will pay off. But there is always a big question mark upon how much to invest and till what point of time we should invest. What if there are no returns? What do we do then? The key lies in calculating a horizon. This Horizon for Projections based on precise and astute calculations would help you understand when cash flows in any organization become stable, steady and mature.

Lesson 6 – Discounted Cash Flows:

Have you heard about DCF, FCFF and FCFE? It is related to the valuation of a company. If you want to value a firm, you should discount the Free Cash Flow to the Firm (“FCFF”). If you are trying to value the equity portion of the Company, you should discount only the Free Cash Flow to the Equity holders (“FCFE”). Do these terms and ideas sound alien to you? If you are involved in a business or are working with an MNC, then these concepts ought to be at your fingertips! Start learning now and read about DCF, EBITDA, PAT, etc.!

Lesson 7 – Relative Valuation versus DCF:

For those to whom DCF or Discounted Cash Flows are a known concept, they would know that it is also a long and elaborate process. For those who do not know, there is another methodology of valuation of a company called Relative Valuation. This is greatly useful in determining the value of a company with relation to the values of listed companies whose stocks are already being traded in markets. Clients, senior management or colleagues might ask you what the valuation of a company is. What do you then? You apply the Relative Valuation methodology and give them the answer! It varies from industry to industry. But if you apply this methodology and calculate accordingly, it might not seem that difficult!

Do you want to add to this list?

If you have any questions, feel free to start a discussion thread below!

About Author

avatar EduPristine

Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.

Comments

Interested in this topic?

Our counsellors will get in touch with you with more information about this topic.

* Mandatory Field

`````````````````````````````````````````````````` Post ID = 40162