Copyright© - IMS Proschool Pvt. Ltd.

Financial Modeling

Introduction

Financial Modeling

Session - 1

This section briefly describes financial modeling and its application. The section will help you to get an overall perspective on how building this skill can help different finance professionals.

Copyright© - IMS Proschool Pvt. Ltd.

What is a Financial Model?

• It is a representation for numerical flow of any financial data.

• It is a decision making and planning tool for finance professionals.

• It is performed with the help of a spreadsheet or some dedicated financial software.

2

Who makes financial models and why?

It is widely used in financial decision making and planning processes to answer questions such as:

• Is the stock undervalued or overvalued?

• Whether to make investment in the project or not?

• Should loan be given for a project or not? What is the rating of the

project or company?

Various finance professionals who use financial modeling are:

• Bankers

• Investment Bankers

• Project Finance professionals

• Equity Researchers

• Financial Planning Advisors

• PE & VCs

• Hedge Funds

Copyright© - IMS Proschool Pvt. Ltd. 3

What does a model look like?

• A models can be very basic , perhaps a single excel sheet OR

• It can be 30-40 sheets or even multiple workbooks with several macros and can be fairly detailed and complex.

• It largely depends on the end use that you have in mind.

• If used for internal analysis it may remain a simple Excel worksheet or the final output may be a well done report.

Example…

Copyright© - IMS Proschool Pvt. Ltd. 4

Attributes of Good Models

• Realistic: Assumptions used in the model should be realistic to get realistic output else a common saying prevalent among

financial modeling professionals is “Garbage in, Garbage out”.

• Error-Free :Many financial decisions are based on models, hence it should be error free for non-erroneous decision.

• Flexible: Changes are inevitable, hence the model should be flexible enough to incorporate any level of changes.

• Easy to use: The model should make it easy for a user to understand the movement of figures.

• Easy to understand: Should not be a one man’s language.

Prerequisites for Learning Financial Modeling

• Knowledge of MS Excel

• Basics of Economics

• Accounting Fundamentals

• Financial Management

• Knowledge of Financial Market