Why To Use Financial Modelling In Excel

Financial modeling in excel defines the tools used for creating the expected financial statements while predicting the company’s future financial performance using the historical and assumption performance information. These economic models are being used in DCF Valuations, Private Equity, Merger and Acquisitions, Project Finance, and so on.

Why Do We Consider Excel In  Financial Modelling

Forecasting operations for an organization into the future involves complexity. Each business is unique, and hence it requires each specific set of calculations and assumptions. Microsoft Excel is used because it is considered the most customized and flexible tool available. As an alternative, Software can be rigid to some extent and doesn’t allow you to understand each line of operations the way Excel does.

You will be able to learn the below functional area while practicing Financial Modelling in excel-

  • You can learn advanced features of Microsoft Excel.
  • It helps you to become one of the top Excel users in your team
  • You will be able to carry out a regular task than before
  • It teaches you to build P& I statements from raw data extraction
  • Assist in creating cash flow statements
  • You will be able to discover how to value a company
  • Helps in building valuation models from the scratch
  • Creating models based on multiple scenarios
  • Ability to design professional–looking advanced charts

What Are The Excel Skills Required To Build Financial Modelling?

To execute financial modeling in excel, you would require the following knowledge of excel-

  • SUM Functions – Adding up a set of numbers.
  • AVERAGE Functions: Calculating the average from a set of numbers.
  • COUNT Functions: Counting the number of cells containing numbers
  • MIN and MAX Functions: Calculating the minimum and maximum from a set of values.
  • SUMPRODUCT Functions: Multiplying two sets of arrays and adding the totals.
  • IF Functions: It is a logic-based formula that can make your model more dynamic.
  • Charts & Graphs: These are an essential part of financial modeling in excel used to give an easy presentable look to your project.
  • Formatting skills: This skill enables you to distinguish and separate can help separate great ones from good models.

Steps For Building Financial Model

Historical data: You need to input three years of recorded information for calculating an assumption of the company’s financial performance.

Metrics & Ratio – Calculation of the historical metrics for the account of business, such as growth percentage, asset turnover ratio, inventory changes, and more

Assumptions – Making an assumption on the components of ratio and metrics based on the historical information.

Forecast: You need to deal in forecasting the balance sheet, income statement, and cash flow statement for the future by making a reversal in your calculations of previous data.

Valuation: In the end, evaluating the valuation of your organization needs to work out with the Discounted Cash Flow (DCF) analysis method. Knowledge about DCF models and valuation is required.

Importance:-

Financial Modeling in Excel is everywhere around the web. There have been many write-ups regarding Financial Modeling; though, almost all the training pieces are the same. It usually goes beyond the general explorations and gibberish practices used by Financial Modeling as used by all research analysts and investment bankers.