February 5, 2013
An exposure and expertise in building financial models typically opens the gate to the world of investment banking, equity research and trading desks. But the power of financial modeling skill set lies far beyond the barriers of these. Ability to produce a financial modeling equips you to position yourself in various other financial modeling jobs, some of which are detailed below –
Corporate Strategy & Planning Department in an organization is actually engaged into preparation and monitoring of Growth Strategy. This can be growth through organic route (entry into a new business, geography, product or service segment etc.) and / or inorganic route.
Once the Growth Strategy is decided, itâ€™s broken down into a long term strategic plan which in turn is broken down to annual operating plans for the company. Departmental strategy and plans derive their basis from the organizationâ€™s overall Growth Strategy.
Needless to say, a strategy is difficult to be approved by the board unless itâ€™s supported by the numbers. All the analysis behind the strategy formulation such as market analysis, drivers identification, return on investment, return on capital deployment, capital expenditure, IRR & NPV of new projects, mergers, acquisitions, demergers, strategic investment, financial investment, IPO, lending, borrowing and many more such analysis are nothing but outcome of intense financial modeling.
All the judgments, qualitative or quantitative information, data collection, though process, expert opinions etc. ultimately find their way into excel based models which in turn manifest into strong and rigorous tools for decision making by the management.
This field exposes itself to financial modeling on a daily basis. Main activities here are financial strategy, financial planning, fund raising through debt and / or equity from primary and / or secondary markets, treasury management, hedging and risk management. All these activities are primarily intense hardcore financial modeling.
There is a financial model at the core of CMA data for banks / lending institutions, pre money / post money free cash flow analysis for PE investments, DA / DP (drawing power) calculation for working capital, identification and pricing of the right hedging instrument, projections for a project to secure project finance amongst others.
Cost control measures require thorough analysis of each of the cost heads and identification of the drivers behind them.
The costing department undertakes activity based cost modeling at the beginning of each year for all the activities of the organizations based on historical trends, expected inflation, interest rate profile, exchange rate fluctuations and other variables.
They monitor the actual costs throughout the year against the costing done by them, conduct variance analysis and suggest cost control measures.
Marketing departments selectively engage into cost plus method of pricing their products (existing or new launches). They stack all the expenses and add to it depreciation, interest profile, taxes, duties and ultimately profit margin to arrive at the benchmark prices for their products.
This necessarily requires the skill set to develop a financial model.
Due diligence primarily involves cutting across business plans, questioning & revisiting assumptions, feasibility analysis of the plans, commercial, strategic and business intelligence.
While this may not involve active financial modeling, you wonâ€™t be able to complete your due diligence unless you know financial modeling. One will not be able to diagnose a business plan / business model / operating model unless he / she himself knows how to make a model / plan.
Negotiations from your side will be stronger if you are better prepared with the costing of all the materials and services required in a contract. You will be able to identify over pricing and even under pricing of an offer, quote or a contract.
Venturing into new businesses, geographies, products, tenders, work fronts will never see a decision by top management / board unless such ventures yield more than company specific internal benchmark returns, IRR or NPV.
A bid can never be priced unless you have stacked all the costs at one place, load it with interest, depreciation, unforeseen expenditure, contingencies, profit margin and some factor of safety.
Only a financial modeler can enable this Department.
Working Capital Management, hedging, risk management etc. require quick calculations and pricing. Short models are very prevalent in the organizations. In-house / Proprietary Desks will be subjected from simple to complex modeling on a daily basis depending on the instruments you are trading into (equity â€“ fundamental / technical analysis, debt, swap, options, futures, commodities, securitization etc)
Trading will be sound and secure only if you have ability to make quick models and take decisions based on them. Markets may not wait for you to develop a detailed model before presenting and withdrawing an opportunity. Depending upon what you choose to trade, you will be subjected from light to intense modeling on a daily basis.
In all these fields stated above, financial modeling is the core requirement. Abundant job postings in each of these areas can be seen on job sites such as naukri.com, monster.com, iimjobs.com where financial modeling is laid down as key / mandatory requirement for application and selection.