MOHIT SHRIVASTAVA
@mohitshrivastavabhopal
Financial modeling for
dummies: A beginner's guide
to predicting the future.
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MOHIT SHRIVASTAVA
@mohitshrivastavabhopal
Financial modeling involves
creating mathematical
representations (models) of a
company's financial
performance, projections, and
valuation.
These models use various assumptions
and variables to simulate potential
scenarios and aid decision-making.
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Types of Financial Models:
Three-statement model
Discounted cash flow (DCF) model
Merger and acquisition (M&A) model
Initial public offering (IPO) model
Leveraged buyout (LBO) model
Sum-of-the-parts model
Consolidation model
Budget model
Forecasting model
Option pricing model
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Where is Financial Modeling Used?
Investment banking: Financial
modeling is used to assess the
potential risks and returns of
investments, such as mergers and
acquisitions, IPOs, and LBOs.
Corporate finance: Financial modeling
is used to make informed decisions
about budgeting, forecasting, and
strategic planning.
Equity research: Financial modeling is
used to value companies and
generate investment
recommendations.
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Private equity: Financial modeling is
used to identify and assess
investment opportunities, as well as
to manage portfolio companies.
Venture capital: Financial modeling
is used to assess the potential of
early-stage companies and to
make investment decisions.
Commercial banking: Financial
modeling is used to evaluate loan
applications and to assess the
creditworthiness of borrowers.
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Credit analysis: Financial modeling
is used to assess the risk of financial
instruments, such as bonds and
derivatives.
Financial planning and analysis
(FP&A): Financial modeling is used
to create budgets and forecasts, as
well as to analyze a company's
financial performance.
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Benefits of Financial Modeling:
Improved decision-making:
Financial models can help
businesses and investors make
more informed decisions by
providing insights into the potential
impact of different scenarios.
Increased transparency: Financial
models can help to improve
transparency and accountability by
providing a clear and concise
overview of a company's financial
performance.
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Enhanced risk assessment:
Financial models can be used to
assess and mitigate risks by
identifying potential financial
problems early on.
Better communication: Financial
models can be used to
communicate complex financial
information in a clear and concise
way.
Increased efficiency: Financial
models can help to automate
financial tasks and save time.
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Drawbacks of Financial Modeling:
Reliance on assumptions: Financial
models are only as good as the
assumptions that are used to build
them. If the assumptions are
inaccurate, the model will be
unreliable.
Complexity: Financial models can
be complex and difficult to
interpret, especially for those who
are not familiar with financial
modeling principles.
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Time-consuming: Building and
maintaining financial models can
be time-consuming.
Costly: Financial modeling
software can be expensive, and
hiring a financial modeler can be
even more costly.
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How to Build a Financial Model:
(1) Define the purpose of the model.
What do you want to use the model for?
Are you trying to value a company,
forecast future earnings, or assess the
impact of a strategic decision?
(2) Gather the necessary data. This
may include historical financial
statements, market research, and
industry benchmarks.
(3) Build the model. This involves
creating mathematical formulas and
relationships between the different
variables in the model.
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(4) Test the model. This involves
running different scenarios through
the model to see how they impact
the results.
(5) Validate the model. This involves
comparing the model's outputs to
real-world data.
(6) Use the model. Once the model
has been tested and validated, you
can use it to make informed
decisions about your business or
investment.
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Best Practices for Financial
Modeling:
Use clear and concise language.
Document all assumptions and
calculations.
Test the model thoroughly.
Validate the model against real-world
data.
Update the model regularly as new
information becomes available.
Peer review the model.
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Financial Modeling Software:
Microsoft Excel
Google Sheets
Quantrix
Oracle BI
IBM Cognos
SAS Model Manager
Anaplan
Workiva
Adaptive Insights
Jedox
Vena Solutions
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Microsoft Excel: Excel is the most widely
used spreadsheet program in the world,
and it is also a popular choice for
financial modeling. Excel offers a variety
of features for financial modeling, such
as pre-built templates and functions,
data validation, and reporting tools.
However, Excel can be complex to use,
and it is important to have a good
understanding of financial modeling
principles before using it to build
complex models.
Google Sheets: Google Sheets is a cloud-
based spreadsheet program that is
similar to Excel. Google Sheets offers
many of the same features as Excel for
financial modeling, but it is also more
collaborative and easier to share with
others.
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Quantrix: Quantrix is a dedicated
financial modeling software program
that offers a variety of features to help
users build and maintain complex
models. Quantrix is known for its ease
of use and its powerful modeling
capabilities.
Oracle BI: Oracle BI is a business
intelligence platform that includes a
variety of features for financial
modeling. Oracle BI is a good choice
for large businesses that need a
powerful and scalable financial
modeling solution.
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IBM Cognos: IBM Cognos is another
business intelligence platform that
includes features for financial
modeling. IBM Cognos is a good
choice for businesses that need a
flexible and customizable financial
modeling solution.
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These software programs offer a
variety of features and functionality to
help users build and maintain financial
models.
Some of the most common features
include:
Pre-built templates and models
Built-in functions for financial
calculations
Data validation and error checking
Collaboration tools
Reporting and visualization tools
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Financial Modeling: A Case Study
Here is a case study of how financial
modeling was used to make a business
decision:
Acme Corporation is a manufacturer of
widgets. The company is considering
expanding into a new market. To
assess the feasibility of the expansion,
Acme's management team builds a
financial model.
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The model incorporates a variety of
factors, such as the cost of the
expansion, the expected revenue from
the new market, and the company's
existing cost structure. The model also
includes a number of assumptions,
such as the growth rate of the new
market and the company's operating
margins.
After running different scenarios
through the model, Acme's
management team determines that
the expansion is feasible and is
expected to generate a positive return
on investment. The company decides
to proceed with the expansion.
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Financial Modeling for Startups
Financial modeling is especially
important for startups. Startups often
have limited resources and need to make
careful decisions about how to allocate
their capital.
Financial modeling can help startups to:
Identify and assess potential business
opportunities.
Develop a business plan and financial
projections.
Attract investors and raise capital.
Track their financial performance and
make informed decisions about their
business.
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Financial Modeling for Investing
Financial modeling is also used by
investors to assess the potential risks and
returns of investments. Investors use
financial models to:
Value companies and identify
investment opportunities.
Perform due diligence on potential
investments.
Make informed investment decisions.
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Financial Modeling for Risk
Management
Financial modeling can also be used to
assess and manage risk. Businesses and
investors can use financial models to:
Identify potential risks to their
business or investment.
Assess the severity of potential risks.
Develop and implement risk
mitigation strategies.
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Future of Financial Modeling
Financial modeling is a rapidly evolving field.
New technologies and techniques are
emerging all the time.
Some of the key trends in financial modeling
include:
The use of artificial intelligence (AI) and
machine learning (ML) to automate tasks
and improve the accuracy of models.
The use of big data to improve the
quality of the data used in models.
The development of cloud-based
financial modeling software that makes
it easier to collaborate on models and
access them from anywhere.
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MOHIT SHRIVASTAVA
@mohitshrivastavabhopal
Financial modeling is a powerful tool that
can be used to make better decisions in a
variety of industries and for a variety of
purposes.
Financial modeling can help businesses to
improve their decision-making, increase
transparency, enhance risk assessment,
and communicate complex financial
information in a clear and concise way.
If you are interested in learning more
about financial modeling, there are a
number of resources available online and
in libraries.
YOU CAN ALSO TAKE COURSES OR
WORKSHOPS ON FINANCIAL MODELING.
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@mohitshrivastavabhopal
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