Financial Modelling in Excel For Beginners

Financial modelling is a valued skill in financial analysis. The aim of building financial modelling is to create an abstract representation of the company’s future in Excel. Financial models are effective for providing forecasts related to a company’s growth, equity value, discounted cash flow and other important parameters. There are different types of financial models about which you can learn by enrolling in online financial modelling courses. In this article, you will learn the steps for creating a financial model.  

Table of Contents

• What is Financial Modelling?
• Types of financial models
• Financial Modelling in Excel

What is Financial Modelling?

Financial modelling, in simple words, is creating a tool that shows what might happen to a business's money in the future. Think of it like a financial "what if" game. You take a company's current financial information and then make educated guesses about what might happen next. For example: "If we sell 10% more products next year, how much profit will we make?" "If we open a new store, how long until it pays for itself?" "Is it better to buy new equipment now or lease it?" It usually involves building spreadsheets that calculate how changes in one area (like sales) affect everything else (like profits, cash, and debt). People use financial models to make better business decisions, plan budgets, value companies, or decide whether an investment is worth making. Just like weather forecasts try to predict rain or sunshine, financial models try to predict profits or losses - they're not always perfect, but they help people prepare for what might come.

Types of Financial Models

There are different types of financial models. Following are the top 10 most used financial models:

• Budget Model
• Forecasting Model
• Consolidation Model
• Merger Model (M&A)
• Option Pricing Model
• Sum of the Parts Model
• Three Statement Model
• Leveraged Buyout (LBO) Model
• Initial Public Offering (IPO) Model
• Initial Public Offering (IPO) Model
• Discounted Cash Flow (DCF) Model

Any financial model is built based on actual values and assumptions. Let us know the steps for building a financial model. These steps remain constant for most models. The only difference is in variables that are required. 

Financial Modelling in Excel

Past 3-year Financial Information: You should have the financial information for the past three years. This is required to get a close estimate of the year-on-year growth rate prediction. You will be able to analyse the trends and have a better understanding of the financial statement.

Metrics Calculation: You will have to calculate various metrics that will help in providing the forecast. Growth rate, asset turnover, enterprise values are some of the metrics. 

Building Forecast: Based on the assumptions, you will build a forecast for the cash flow statement, balance sheet, income statement among other financial statements. 

Prerequisites for Building the Model

Those who have a strong fundamental knowledge of accounting can build financial models. Financial models are built based on accurate values and assumptions. Lesser assumptions will bring more accuracy to your financial model. 

Excel is essential since financial modelling involves a lot of complex calculations based on assumptions and actual values. You can use other software as well but to date. Excel has proven to be the most flexible and customizable tool. 

You should have knowledge of the MS Excel formula that is used for building these models. For understanding, we will start with the Discounted Cash Flow (DCF) Model.

The Discounted Cash Flow Model (DCF)

Discounted cash flow is a valuation method where the value of investments is based on the expected cash flows in future. You are estimating the present value of an investment by predicting the estimated amount of future money generation by that asset. 

Variables in the Model

This model consists of the historical dataset as well as assumptions. We are taking the following assumptions: 

• Tax rate: You will consider the historical effective tax rate of the company to forecast tax. 
• Discount rate: It is the rate by which you can discount the cash flow in future. To calculate the discount rate.
• Perpetual growth rate: This cannot exceed the growth rate of the economy and hence it lies somewhere between historical inflation (2-3%) and GDP rate (5%). 
• EV/EBITDA Multiple: The enterprise multiple helps in determining the value of the company. If you belong to a high-growth industry, the multiple will be higher and if it is a slow-growing industry, the multiple will be lesser.
• Current price: Here, we are considering the present value of each share.
• Shares Outstanding: The number of shares available.

Excel comes in handy when we are calculating the DCF for n number of years. As the forecast time progresses, the calculations become complex. Excel helps in providing the forecast for the number of years of your choice. In this analysis, you can notice that DCF has been calculated till the exit. Exit or terminal value is the expected business value beyond the forecast year. The time when we expect stable growth. We are also forecasting the unlevered free cash flow. To get this forecast, we are removing earnings before interest and taxes. Through this model, you will also be able to forecast equity value per share.

Courses To Learn Financial Modelling in Excel

Following courses are useful for those who want to learn financial modelling in Excel:

Course Name	Description
Beginner to Pro in Excel: Financial Modeling and Valuation	This course aims to provide financial modeling skills in Excel for practical job application. It includes case studies based on real situations and downloadable resources. It covers building P&L statements, cash flow statements, valuation models, and advanced charts. This financial modelling course is suitable for graduates who want to build their careers as investment bankers and finance professionals seeking to improve their Excel and financial modeling abilities.
Financial Modeling & Valuation in Excel - Complete Course	By enrolling in thisAims to be a comprehensive package of Excel, accounting, ratio analysis, financial modeling, forecasting, and business valuation techniques. Covers Excel functions, financial modeling from scratch, valuation techniques, cash flow statement construction, and financial statement forecasting. Useful for finance professionals, investment bankers, and students.
Financial Modeling Crash Course with detailed Excel Models	Covers business planning and discounted cash flow (DCF) methods with real-life case studies. Involves building dynamic business models with multiple scenarios.
Financial Modeling with MS Excel Advanced	Provides a comprehensive overview of financial modeling principles and concepts. Includes a simulation exam, Excel templates for practice, case study-based chapters, and quizzes. Covers valuation modeling, merger and acquisition analysis, project finance modeling, and Monte Carlo simulation.
Financial Modelling and Valuation	A beginner-friendly course that aims to teach financial modeling, investment decision techniques, financial statement analysis, and company valuation. Involves analysing financial statements of companies like Hero Moto Corp and Nestle India. Covers basic Excel tools, financial modeling tools, time value of money, NPV, IRR, payback period, and absolute and relative valuation methods.
Financial modeling & valuation analyst ms excel	Enhances knowledge of financial modeling and valuation analysis using MS Excel. Curriculum includes Excel formulation and functions, time value of money, analysis of profit and loss statements, loan repayment calculation, depreciation methods, financial ratio analysis, and financial charts and dashboards.

Conclusion

A financial model helps in thinking about the different aspects of the business that can impact it positively. Once you start building financial models, you are able to understand the cash flow situation within the company. Accordingly, the company will be able to build an appropriate funding strategy. Over the years, financial modelling helps the company understand the areas with the scope of improvement. It also gives a projection for the growth over time.