My 90-Day Challenge to Master Financial Modeling

Why am I doing this? As a freshman at Cornell, I’m just as confused as the next person when it comes to figuring out my life. After recently declaring my major in Econ and Info Sci, and anxiously looking up online about how to be financially independent, I discovered the world of financial modeling. As a writer who wrote on less serious topics of food and travel, I took it upon myself to explore this seriously and maybe write about my experience learning it, making it more and more relevant to my daily life. So here it is, and in order to keep myself accountable, I want to see if I can educate myself on this matter, and hopefully others along the way.

So, let’s start.

Financial modeling is defined by Investopedia as “a representation in numbers of a company’s operations in the past, present, and the forecasted future,” a tool that can be utilized when making financial decisions or forecasting the potential profit of a project. Even for people not in the business or finance sector, financial modeling is useful to track your own finances and for smart investing. Financial modeling is most often completed using Microsoft Excel, suggesting that honing your Excel skills before diving deeper into financial modeling is important. I’ve realized there are so many types of financial models out there, but for the sake of our sanity, I’ll just outline the few commonly used types according to the Corporate Finance Institute:

1. Three-Statement Model: a model that forecasts the holistic financial standing of a company using three different statements: balance sheet, income, and cash flow statement

2. Discounted Cash Flow (DCF) Model: a model that determines the value of an investment today using predictions on its future value

3. Merger Model (M&A): a model used to visualize the result of two companies merging together

4. Initial Public Offering (IPO) Model: a model that lays out a private company making their initial sale of stock shares available to the public

5. Leveraged Buyout (LBO) Model: model that shows the result of “the acquisition of another company completed almost entirely with borrowed funds”

When considering which model structure is optimal, Wall Street Prep states that there are two components to consider: “granularity and flexibility.” The first, granularity, relates to the extent of detail needed for the model to achieve whatever goal you have. Be careful, though, because the more granular your model, the more data you likely have to organize, which can increase room for error. Flexibility pertains to the way your model will be used: how often, by whom, and for what. For example, a merger model (M&A) template would require higher granularity and flexibility, while a leveraged buyout (LBO) one pager–a one-page summary of how one company plans to acquire another company–would require lower granularity and flexibility.

The numerous financial models may appear intimidating, but there are a few tips that can help you excel at creating them, including:

• A good background in accounting (I’ll need to work on this)

• Mastering Microsoft Excel (Take this Coursera course! It was fun)

• Understanding the three different statements (balance sheet, income, cash flow statement)

• Utilizing simple formulas in your model

• Knowing the end goal of your model

• Paying close attention to detail

• Having a concrete model structure (such as Alberto Bazzana’s suggestion: a cover page to introduce your model, a drivers tab with inputs and assumptions, a model tab with calculations, an outputs tab that highlights the most important takeaways from your model, and a sensitivities tab that showcases the model’s output based on various scenarios, sensitivities, and data outcomes)

Overall, it is evident that there is a lot to learn when it comes to financial modeling. Given its practicality and necessity for businesses, however, it is a worthwhile and valuable skill to have. On second thought, I think I’ll be spending some more time getting to know the ins and outs of financial modeling over these next 90 days!

Find the original article here.