You’ve heard the term financial modelling somewhere but you don’t really know what it is?
Don’t worry, we’ll try to explain all the basics you need to know, so you’ll be able to try it yourself!
Whoever works on a position related to finance, accounting or business metrics has probably heard this term a million times.
It’s not unusual, as financial modelling is closely connected to the corporate financial world.
Financial modelling is creating an abstract representation of the company which you make in Excel. It takes some analysis skills to be as good as you can in this action.
So, why do we use it?
You can use financial modelling as a tool to make your business decisions easier!
It helps you with questions such as investing in a business, investing in a project, raising money, etc.
The decision is being made through test scenarios and observation of outcomes.
Except it is a daily routine for anyone working in areas of corporate finance, it can be very useful if you’re trying to expand your business.
Types of financial models
The type of financial model you’re going to use depends on a decision you’re trying to make.
There are many types, such as the 3-statement model, sensitivity analysis model, scenario analysis model, budget model, and others.
For every business, you need to create specific calculations and assumptions.
Because it is the most flexible one among many other programs, Excel is the most common one in financial modelling.
Skills you’re going to use from Excel are SUM, AVERAGE, IF, MIN & MAX, COUNT and SUMPRODUCT function, as well as formatting skills followed by visual charts and graphs.
Starting financial modelling
Just like you can get confused if you’re paying something you’re not even aware of to the bank, for example payment protection insurance, you can find yourself in the same position with financial modelling.
Because financial modelling can get complicated and complex, before you get into it, you should know and understand the foundations of accounting.
You need to be familiar with their connections, calculations, etc. If you don’t know these fields, you should take a few hours of courses.
Steps in financial modelling
To make it as simple as it can get, you should follow these few steps!
First of all, input financial information for at least the last 3 years of your business.
Then, calculate metrics and ratios – inventory changes, margins and growth rates.
Focus on the future – make assumptions about what future margins, growth rates and inventory changes should look like.
Also, use these assumptions you’ve made in the previous step to reverse the calculations from metrics and ratios to make financial statements.
After you’ve filled the statements, evaluate the company by using the Discounted cash flow method and model.
The final look
To know how a final version of your modelling should look like, listen to your common sense.
It should be structured, with a good layout, simple, accurate, easy to understand and focused on real issues.
If you want to expand your understanding of the business law, Optimal Solicitors and their Manchester team are available to everyone interested in the business field, giving you and your business an individual, specific approach!