Financial Models and How to Create them Effectively

Hey there! So good to have you back again. In this blog, we will understand how Finance Professionals can create effective financial models. We will also be covering some of the most frequently asked questions related to financial models. Let us quickly find out.

Financial models sound familiar, right? Before we deep dive, let us first understand what is financial modeling. In simple terms, a financial model helps in making a forecast. To be precise, it is a dynamic forecast derived from a company’s financial statements. These financial models can make a forecast for a period of up to five years. In some cases, it may even cover up to 10 years. Thus, these financial models can be shorter or longer.

Today, financial models help in making critical operational and financial decisions. Thus, it is important for all accountants and financial professionals to know how to create effective financial models. You must be wondering what type of decisions are based on financial models. A lot of decisions are based on these financial models but some of the most common ones are listed below:

1. Planning and Budgeting: Key decisions about staffing, resource allocation, and other planning decisions are all a result of well-built financial models.
2. Valuations and investments: Companies primarily create effective financial models to get answers to questions like should we buy another company. If yes, then how much should we pay to get the best deal?. Financial models also provide clarity on whether the company should invest in a new project.
3. Credit and leveraged buyouts: Financial models also provide detailed insights to enable some of the best financing and credit decisions.
4. Mergers and acquisitions: Financial models help in making some of the crucial decisions and provide insights that guide M&A decisions. Important decisions made by the company heavily rely on an effective financial model. There are certain challenges as well that prevent several companies from enjoying the full decision-making benefits of the models.

You must be wondering what these challenges are.

To create an effective financial model, it is essential to have the company’s historical financial statements, which help in forecasting. This may sound simple, but building an excellent financial model is anything but easy. Most of the financial models seen today are confusing, complicated, and difficult to understand.

To overcome such challenges, an effective financial model needs to work in two distinct ways:

• A great financial model should work well electronically: It means that every formula mentioned in the spreadsheet should make sense. Anyone who is reviewing the file should be able to understand what is mentioned in every single cell. However, this is not the case with many financial models.
• A good financial model should also work well on paper: A majority of decision-makers still make decisions through document papers. This is significant in the case of senior executives. Financial models act as a powerful communication tool. An effective financial model should be able to tell the story rather than just displaying mere facts and figures. It should be able to provide all the information needed to make an optimal business decision.

Let us now deep dive and understand how to create optimal financial models. 

It is rightly said that financial modeling is a multidisciplinary skill. To begin crafting effective financial models that tell a story, professionals must develop the following individual skills.

• Technical skills: It is important to be well versed with spreadsheet functions, model design, data flow, and financial presentation. This can be achieved by taking a financial modeling course. In this course, candidates will learn how to create simple as well as complex financial models using Excel, which is widely used in the Finance industry.
• Business skills: It is also important to be well versed in the domain of Accounting, Finance, and Business Operations. When you finally possess these skills, it is even more exciting to build strong and effective finance models which are dynamic, flexible, transparent, transferable, intuitive, and printable. When all these criteria are ticked off, it builds strong credibility for the owner and tremendous confidence in the reader as well. One point to be noted is that before one starts to build a financial model, it is extremely important to plan it out first. Model planning is as important as the outcome. Spending a little more time and focusing on the execution can eliminate a lot of problems and confusion that model creators often face.

Financial modeling course in India is emerging as a highly sought-after career for finance professionals. If you are interested to know more about the scope of the financial modeling course or are just confused or wondering if the financial modeling course is useful, feel free to get in touch with our counsellors, who would be more than happy to guide you and help you make the right career choice. All the best and happy learning!