Financial Modelling is a process by which a business generates cost-effective ideas and risk management techniques to manage the financial capabilities of a company better. It is used widely for preparing company budgeting strategy, capital structure and during mergers and acquisition.
Financial models are a representation of the performance of the various financial assets of any company which is in line with the economic situation in the real world. Financial Modelling includes the valuation of the company, growth forecasts and performance forecasts of a company’s existing financial assets and spreadsheet models. It is a representation of a company’s financial position to facilitate the effective managerial decision-making process.
Financial Modelling is a complex task and requires highly skilled personnel. Therefore, financial modelling courses have become very popular.
Financial Modelling Techniques
Financial Models uses Excel modelling as a way to represent a company’s past, current and future financials. Therefore, to be able to employ these techniques, one needs to have in-depth knowledge of Excel.
Financial Modelling techniques are an essential decision-making tool, which is widely used in the corporate world. Let us have a look at a few of the most commonly used Financial Modelling Techniques.
Historical Data – Historical data analysis uses a forward-looking process to determine future trends effectively. This implementation of this modelling technique requires the following of specific steps.
Step 1 – Determine the objective of Modelling.
Step 2 – Collect data from credible sources. The credibility of citations is significant to assure that the results reflect the real picture.
Step 3 – Perform data analysis using various statistical tools and techniques.
Assumptions – Assumptions require sense-making of the statistical analysis performed on the historical data. The statistical analysis breaks down the data into numbers. These numbers form the basis of assumptions as while forecasting and planning the financial strategy, and a company needs to be realistic in its outlook of the future. While making assumptions, a financial manager tries to fuse the internal and external information scientifically. One might mistake assumption as guesswork, but the process is always well planned and strategic as these assumptions are the key driver of the financial performances of an organization.
Colour Coding – It is a necessary form of representation used in financial Modelling to make sure that the users of the information can understand that different values belong to other parameters. Colour coding of the cell is a widely used feature of Excel, which makes helps to indicate whether the performance of a particular parameter meets the expectation or not.
A financial model is a tool that helps in the decision making of a firm. Let us look at some standard Financial models.
Three Statement Model
It uses three primary financial statements
1. Income Statement – To ascertain Profit levels of a company.
2. Balance Sheet – To ascertain the asset health, equity standing, etc. of a company.
3. Cash-Flow Statement – To see the company’s cash balance and short term liquidity.
This model helps to determine the current standing of a company concerning individual other companies. A financial manager prepares specific ratios like PE Multiple, PB ratios and so on to compare financial performances.
Discounted Cash Flow Model
This model is used predominantly by investors to predict the future cash flows of companies to make an investment decision. Stock market traders also use it before they purchase shares of a company.
In today’s scenario, as managing the finances of a company is becoming increasingly complex and sophisticated, especially with the advent of automation and technological dynamism, Financial Modelling helps to make rational investment decisions. Financial Modelling Courses, therefore, try to provide a holistic knowledge to aspirants of modelling techniques that can catapult them in a high career growth trajectory.