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Priyanka Prajapati | Investment Banker

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Investment Banking is one of the most trending term in the world of finance. Nowadays, many experienced professionals and graduates want to be an Investment Banker. It is one of the hardest, most lucrative and best paying jobs in the world. 

As more and more people are aspiring to be an Investment Banker and jobs are limited in this domain, recruiters are picky and choosy in hiring the best talent. It makes slightly tough for any fresher to enter into this high profile industry. 

Nonetheless, if you have analytical mind and you are very keen to make your career in Investment Banking then with the right education and right knowledge, you can successfully build your way in IB.

Education Criteria for entering into IB Industry 

1. MBA (Finance)

Investment Bankers prefer MBA Finance as top applicants’ profiles over other profiles. MBA Finance teaches students all the discipline as required in IB domain including finance, accounting, business acumen, marketing, financial analysis, management consulting and accounting knowledge.  Investment Banking is a mix of all the disciplines with majors in finance.

If a candidate is from top tier colleges (IIMs/ IITs, ISB, FMS, Xavier’s, IIFT etc.) then it becomes comparatively easier for them to enter into IB Industry.

2. CFA

If you’re a Chartered Financial Analyst (CFA) Charter, then you can easily make your way to IB industry. However, if you’re a CFA Level 3 candidate or CFA Level 2 candidate, then also you can enter into IB. CFAs are mostly preferred in industries like Investment Banking, Management Consulting, Hedge Funds, Mutual Funds, Brokerage firms, Insurance and Investment Firms etc.

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3. CA

Another preferred education requirement is of a Chartered Accountant (CA). CAs are shifting to Investment Banking Industry on a large scale because of its paying structure and its popularity among the CA students. Another segment which enthusiasts CAs is to get into Financial Due Diligence team of Investment Banking.

4. Graduation

The bare minimum education requirement is to get a graduate degree in any discipline. But graduation will only make you enter into IB at an entry level (Intern). You can enter to Analyst or Junior Analyst level if you have graduated from a renowned institute.

One can immediately become an Investment Banker post-graduation but you need to have good experience, knowledge and further qualification to sustain in it.

Things to improve to enter into IB Industry 

1. Analytical Skills:

You need to improve your Analytical Skills along with other skills (including but not limited to communication, presentation, excel, interpersonal etc.). Analytical skills play an integral role in IB Industry. 

Working on research and Financial Modelling requires a great analytical mind to adapt and learn these quickly.

2. Mathematical Skills:

This is one of the keys skills for entering or sustaining in IB Industry. If you’re unable to do basic math then IB is not the right industry for you. 

There are individuals who have thrived in this industry through excellent math’s knowledge. Investment Banking’s math is much more than making equations and solving it. 

3. Basic Finance Knowledge:

No Finance recruiter will hire you if you lack in basic finance knowledge i.e; knowledge of three basic statements (Profit & Loss Account, Balance Sheet and Cash Flow Statement), Analysis of the three Statements, Ratios, Securities, Present Values etc.

Finance knowledge is must to crack any interview for finance profile or related domains. An Investment Banker has to work on all the aspects of finance and it is expected from the candidates to be well versed with them.

4. Excel and PowerPoint Skills:

80% of the Investment Banking work constitute of working on Excel and PowerPoint presentations. You are required to be handy with the basic and advanced working of both the tools. 

You can take a video session or video course to learn working on Excel and PowerPoint which will make you job ready without making it a hindrance in your day to day work

5. Financial Modelling: (Plus Factor)

It is a plus for any recruiter if you have a sound knowledge in Financial Modelling. As Investment Bankers work day in and day out on models, they always haunt for people who can build models from scratch.

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Ways to get into Investment Banking

1. Approach to the right personnel

The best way to get your application heard in Investment Banking is to find the right personnel and approach to him directly. While writing a job application, it is required to highlight all the key points in the mail body or cover letter to attract the right eyeballs. 

Usually, you should directly reach out to either Associates or Vice Presidents as they are influential in hiring process in Investment Banking industry other than the HRs.

2. Secure an Internship in Investment Banking

If you already secure an Investment Banking Internship experience, then it becomes easier for you to secure a job in the same Industry. It is comparatively effective to get an Internship position over getting an Analyst position directly. 

3. Be a part of Analyst programs

Most of the big-bracket Investment Banks (Goldman Sachs, JP Morgan, Morgan Stanley, Credit Suisse etc.) conduct Analysts programs in their company for budding and aspiring candidates to join them as an Analyst. You can be a part of either of the programs and showcase your interest in IB to the employer in front. 

4. Build Connections

Building connections and networking is an important part of the job. Connections with the Investment Bankers or with the corporates can help you land a good profile job in Investment Banking.

5. Pursue an Investment Banking Course  

There are several institutes which help candidates in learning the core of investment Banking. They help candidates from scratch of learning the nuances of Investment Banking till the time of securing a high profile job in the same industry.

The WallStreet School is one of those institutes. It has designed a course specifically for budding students who are aspiring to enter into Investment Banking Industry. 

Usually people, who are new to the concept of financial models, have a misconception that there is only one type of financial model which is a three statement model (including Statement of Profit & Loss, Balance Sheet, Cash Flow Statement). 

However, there are various types of financial models and they are used for different purposes. We will be discussing about these models in this article.

Types of Financial Models

  1. Three Statement Model
  2. Credit Rating Model
  3. Discounted Cash Flow (DCF) Model
  4. Comparable Analysis Model
  5. Merger Model
  6. Leveraged Buyout (LBO) Model
  7. Model with Scenarios

Three Statement Model

This is the very basic kind of model which only includes three financial statements (Statement of Profit & Loss, Balance Sheet and Cash Flow Statement), as suggested by the name. It requires one to make certain assumptions and only work on the future projections of these 3 statements. There are subsequent schedules which are required to be prepared which will support the statements including:

  1. Depreciation Schedule
  2. Fixed Assets Schedule
  3. Working Capital Schedule
  4. Debt Schedule 
  5. Tax Schedule etc.

Credit Rating Model

Credit rating Model is usually prepared by the Banks, NBFCs or other Financial Institutions for the purpose of assessing credit worthiness of the borrower. It is only prepared for the purpose of extending debt funding to the borrower. 

It involves working on various ratios including liquidity (like DSCR), Profitability (Interest Coverage Ratio, Profit Margins), Solvency (Debt Equity Ratio, Total Liabilities to Equity Ratio etc.) Credit Rating Model stresses upon the structure of interest payments and principal repayments by the borrower in a timely manner. 

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Discounted Cash Flow (DCF) Model  

DCF Model is another prominent type of model which is prepared by Investment Bankers, Management Consultants, Private Equity or Venture Capital people to conduct valuation through cash flows of the company.

They are two types of valuations- Absolute Valuation and Relative Valuation. Absolute Valuation consists of valuation performed through DCF, Dividend Distribution Method etc. Relative Valuation consists of valuation conducted through Trading and Transaction Comparable. 

Valuation using DCF method is usually prepared in DCF model. It is an addition of three statement model with valuation calculation which is an extension from the forecasted cash flows.

Comparable Analysis Model

Comparable Analysis Model is very similar to DCF Model. It is also a composite of three statement model and the valuation. However, the only difference in Comparable Analysis model is that it is made through comparable analysis valuation or valuation multiples using trading and transaction comparable. 

Trading comparable is performed through assessing the valuation multiples of similar companies listed in the stock exchanges and transaction comparable is performed through evaluating the fund raising or M&A transactions of similar companies happened in the past.

Merger Model

Merger Model, as the name suggests, is prepared specifically in case of merger or acquisition of the target by the acquirer. This is a unique type of model which captures the financials and financial performance of both the companies (Target and the Acquirer) with the adjustments of their synergies.

Typically, there are three steps to prepare a merger model as listed below:

  1. Preparing a separate model of the acquirer with future projections
  2. Preparing a separate model of the target with future projections
  3. Merging both the models into keeping some of the adjustments for the synergies which both the companies will bring to each other’s business.

Leveraged Buyout (LBO) Model

Leverage Buyout is a situation in which the acquirer buys a target company using very small portion of his own capital and a major portion of debt or non-equity source which is raised from the market (Banks, NBFCs, Financial Institutions etc.). Assets of the both the companies usually become the collateral of the loan in this situation. 

The model is built keeping in mind both the situations:

  1. Acquisition of the target company
  2. Raising loan from the market through collateralizing assets of the companies

Major characteristic of a leveraged buyout model is that it only considers debt or non-equity source (like, mezzanine debt, subordinate debt etc.) as a source of external capital in order to earn highest return from the investment as debt is the cheapest source currently which is available in the market.

Model with Scenarios (Convertible Model)

This is a unique type of model which is prepared by high skilled financial analysts. They link the whole model in such a manner that one can see different projections of different scenarios in just one model. The same model shows different results when one changes the scenarios from the assumption sheet.

Usually model with scenarios are prepared keeping three situations in mind:

  1. Optimistic (Management)
  2. Actual (Base)
  3. Pessimistic (Conservative or Investor) 
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Preparation of financial models requires precision and might take even more than 3 weeks of time to complete one fully.

Do you really think that preparation of financial models is a complex task and only financial analysts can perform that task? Or is it really tough to work on complex and lengthy financial models which are even time consuming? 

Well, if it is performed in a proper sequential manner with proper steps, then the complexity breaks down into pieces and it becomes easier to make a professional model.

In the article below, I’ll give you a detailed step by step approach to prepare Financial Models.

Step 1 : Know your Company

It is extremely important to first study about the company whose financial model is getting prepared. This basic study will serve as the base in preparation of the model.  

You can learn about the company through: 

  1. Public sources, 
  2. Company’s website
  3. Discussion with the management of the Company etc.
  4. Published annual reports and analysts’ coverage reports (if the company is listed)
  5. Regulatory Authority of respective countries (if the company is unlisted)

For example; If you are looking for a company which is based in India, then refer to the link of MCA (Ministry of Corporate Affairs) Website for extraction of the basic information relating to the company.

Step 2 : Understand the Industry Dynamics

Next step is to read and understand the industry dynamics from industry analyses reports. It is required to first determine the right industry of your company as majority of the companies function as per their industry dynamics. 

For Example; if you are looking at a company which is operating a QSR (Quick Service Restaurant) Chain in India, then you are required to look at consumer industry then dig down into further subsets of the industry.

Step 3 : Start with the Audited Numbers

Once you are ready with your study on the company and the industry, first step is to start with the insertion of audited numbers (Statement of Profit & Loss, Balance Sheet & Cash Flow Statement) in excel sheet in a proper format for the last 3-4 years. 

It is highly recommended to incorporate audited numbers for a minimum tenure of last 3 years as it helps in better consideration of growth projections.

Step : 4 Find the Assumptions

Next thing is calculate the past ratios like Revenue Growth, Expenses to a percentage of Revenue, Gross Profit Margin, EBITDA Margin, Working Capital Days etc.

Based on the calculation, you are required to forecast the same ratios for future years to calculate the forecasted numbers. 

For Example; if your company has grown by a Revenue CAGR (Compounded Annual Growth Rate) of 20% for last 3 years and the Industry is also growing by the same rate for future years, then you can also assume the same growth rate of Revenue for next 2-3 years.

Assumptions need to be created in a separate tab for Revenue, Cost, Balance Sheet items and other numbers.

Step 5 : Forecast the Income Statement

Post finding the right assumptions, you should start calculating all the forecasted numbers of Statement of Profit & Loss (P&L) from top to down till all the expenses except Depreciation, Finance cost (Interest) and Income tax.

Till this stage, you will get the forecasted EBITDA figures on your sheet. 

As a Financial Analyst, if you are having very initial rounds of conversation with the investors for fund raising, then forecasted numbers till EBITDA will suffice and you will engage in detailed conversation with the investors at later stages.

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Step 6 : Prepare the Supporting Schedules

Before jumping to working on Balance Sheet (BS) directly, it is important to prepare supporting schedules for Balance Sheet. These schedules may include:

  1. Fixed Assets Schedule – To show the bifurcation of fixed assets
  2. Depreciation Schedule – To show depreciation calculation on various fixed assets as per the relevant country laws
  3. Tax Schedule – To Show bifurcation of current tax and deferred tax
  4. Equity Schedule – To show bifurcation of equity and retained earnings and money required for funding
  5. Loan Repayment Schedule – To show interest and principal obligation occurring periodically
  6. Working Capital Schedule – To show the calculation of Receivables, Payables and Inventory 
  7. Schedule for other Balance Sheet Items
Sample Tax Schedule

Step 7 : Complete Statement of Profit & Loss (P&L) and Balance Sheet

Next is to complete the projection of P&L and Balance Sheet through the referencing of schedules build in earlier step. 

You can complete P&L after linking Depreciation, Finance Cost and Income tax from respective schedules. Similarly.

Balance Sheet can be completed through linking subsequent schedules except linking Cash & Bank Balance (Cash & Bank Balance will be calculated post completion of Cash Flow Statement) 

Step 8 : Complete the Cash Flow Statement:

Cash Flow preparation is the easiest part in overall Financial Modelling exercise.

Once the P&L and Balance Sheet (BS) are ready, it only leaves the task of incorporating formulas and doing the linking with P&L and BS for Cash Flow Completion. 

Cash Flow Statement leaves a balance of Cash and Bank at the end of the year which will get linked with the BS’s Cash Balance and will complete the “Three Statement Financial model”.

Step 9 : Prepare Free Cash Flows

Before reaching to this step, you have already succeeded in preparation of “Three Statement Model” i.e; P&L, BS and Cash Flow Statement. 

Further task is to get into Valuations and Sensitivity Analysis.

For Valuation, you are first required to calculate Free Cash Flows to the Firm and Free Cash Flows to Equity through already calculated numbers from 3 statements

Step 11 : Perform DCF Analysis

Next step is to calculate Cost of Equity through CAPM (Capital Assets Pricing Model) Model using Market Rate of Return, Risk Free Rate and Beta along with calculation of Cost of Debt using Interest Rate and Tax Rate which will be helpful in calculation of Weighted Average Cost of Capital (WACC). 

This WACC will be used as a present value rate for calculation of present value of future projected free cash flows. 

Step 12 : Perform Sensitivity Analysis

Post calculation of present value of free cash flows, it is required to do the scenarios check through Sensitivity Analysis.

In this, you are required to calculate various valuation results through changing your assumptions in Optimistic as well as Pessimistic manner. This helps in drawing better conclusion on the authenticity of the assumptions taken.

Step 13 : Perform Ratio Analysis

Performing of Ratio Analysis is considered as a near to completion step. In this step, you’re required to estimate profitability, solvency and liquidity ratios for investors to take better judgement on the investing decisions.

For Example; In your ratio analysis, you need to calculate ratios like Return on Equity, Return on Capital Employed, Return on Assets to highlight profitability position of the company to investors

Ratio Analysis

Step 14 : Prepare Charts and Graphs

Now, it is the time to do some representational efforts. One way is to make required charts and graphs of the important numbers in your first tab.

As Chart and Graphs help in better interpretation of data, you can use them to show those intrinsic values which you want to highlight to your investor.

Investors usually don’t get that much time to spend on just one model, hence, it is recommended to depict important values in a visually comfortable manner, i.e; through graphs.

Step 15 : Final touch up – (Index, Formatting etc.)

As your model is complete now, the only thing which is left now is to do some minor formatting, insert statements & schedules into table, prepare an index with hyperlink etc. 

You can also skip this part, but this step makes your model to look more professional and more attractive.

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Frequently Asked Questions (FAQs)

Is it difficult to make a Financial Model?

If the entire process of making a Financial model is carried out in a structured manner, then it becomes easier to make a professional model.

How much time does it take to prepare a Financial Model?

It depends upon the complexity and scale of Business, industry and assumptions made while preparing it.

Is any prior knowledge required to make a Financial Model?

Yes, basic accounting knowledge is required to understand the financial statements of the company and predict future profits.

Financial Modeling – One of the most frequently heard term if you’re either in Finance industry, or you aspire to be a part of it.

Let’s understand, what’s so special about this term?

I’ll take a very basic example so that you can relate it to your everyday life.

Suppose you own a grocery shop, what are the expenses that you incur? They can be cost of purchasing veggies, fruits etc. Also, the shop rent expenses, electricity bills, the store keeper’s salary etc. Note them down.

Likewise, what are the sources of revenue? In this case, revenue is sources from sale of grocery items. As simple as that. Note them down too.

Do this for past 5 years. Find out the trend in revenue growth and the factors responsible for it, after making realistic assumptions. Likewise, find out the trend in cost increase/decrease.

Now, based upon these trends (which are themselves an outcome of your assumptions) project the future expenses and revenue of the company.

This will help you draft a future Profit & Loss Account and Balance sheet of a Company.

What is Financial Modeling?

Financial Modeling is an activity of preparing any company/ entity’s future financials (Statement of Profit & Loss, Balance Sheet, Cash Flow Statements, Schedules, Valuation etc.) through estimation of numbers in MS Excel (Or any other calculation tool). 

Financial Modelling is a number game and is usually prepared through linking various tabs in MS Excel. It is important to separate assumptions (inputs) from the entire model which are used for projection of financials (output). Various models can produce different results based on the inputs and assumptions that go into it.

These future financials are known as financial models. To view a basic financial Model, click the button below.

Types of Financial Models

There are various types of financial models which exist in today’s world. All these are made for different purposes. Some of the major types of financial Models are –

  • Three Statement Model
  • Merger Model
  • DCF (Discounted Cash Flow Model) Model, Sum of Parts Model
  • LBO (Leveraged Buyout Model) Model
  • Initial Public Offering (IPO) Model
  • Consolidation Model
  • Comparable Company Analysis

These models are generally prepared by Financial Analysts and their base salary ranges anywhere between $85,000 to $1,00,000 at an entry level. The demand of Financial Analysts is also rising with the increase in company’s preference on financial models for better management decisions. 

It is in Financial Analyst’s hands to control the numbers or the structuring of the model. He can increase or decrease the Profit or Loss in the model by changing the underlying assumptions.

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Why Financial Modelling is Important?

The main question is, Why does Financial Modeling even matter to businesses?

Importance of Financial Modelling lies in its usage for various purposes by several growing companies.

Companies prepare a financial model to get private equity funding from investors. They prepare the Financial models to predict the future value of a company, based on which the investor will infuse money and decide the share.

Even investors can prepare the same model. However, they will try to lower down the valuation, by taking different assumptions from those taken by the company.

Let’s see a near exhaustive list of uses of Financial Models

What are the uses of preparing Financial Models?

  • Understanding “Future Operational Performance” of an entity (e.g; number of employees required to hire, number of branches to open, number of quantities to be sold etc.)
  • Understanding “Future Financial Performance” of an entity (e.g; estimation of revenue required to earn, profit margins to generate, costs to spend in future)
  • Estimating the capital expenditure to be incurred in future (e.g; estimation of amount of machinery, furniture and building required)
  • Estimating funds required to fulfill future obligations (e.g; working capital financing, long term or short term financing by way of Private Equity, Public Equity or Debt funding)
  • Calculating cash flows/ free cash flows generated at the end of a given period (e.g; cash flow for operating, investing & financing activities, free cash flows to the firm and free cash flows to equity)
  • Calculating Enterprise Value or Equity Value of a Company (Including Intrinsic Value)
  • Analyzing certain ratios (e.g; profitability ratios, liquidity ratios etc.) 
  • Depicting the trend of a business and relating it with the Industry’s performance (whether a business is depicting an upward growth trend, static growth trend, downward growth trend, no growth trend, negative growth trend)
  • Performing study on multiple scenarios or sensitivity analysis 
  • Other advanced uses (e.g; calculating price of a security, merged financial predictions of two entities, comparable analysis, comparable ratio analysis, comparable valuation analysis, ascertaining exit strategy and Investor’s return during exit etc.)  

Who Prepares Financial Models?

Financial Modelling is widely acceptable and is getting a lot of attraction these days, especially by growing companies, Private Equity Funds, Hedge Funds, Investment Banking Companies, Brokerage Firms, Credit Rating Agencies, Equity or Investment Research Companies, Management or Corporate Consultancy firms etc. 

Let’s see Why do they prepare it –

  • Corporates – for Internal Management Decisions based upon Future Business Performance as predicted in Financial Models.
  • Investment Banking Firms – on the behalf of both their clients and their investors for Company’s Valuation.
  • Equity Research Firms – for publishing the reports on public sources to recommend buying or selling of any security.
  • Management Consultancy, Portfolio Management Firms – for advising their clients on various growth prospects
  • Private Equity Funds, Hedge Funds, Venture Capital Funds – for the calculation of their investment exit return.
  • Transaction Advisory Firms – for their clients to advice them on any transaction such as a merger or an acquisition.
  • Commercial Banks / Non Banking Finance Companies / MFIs – for estimating the performance of their lending portfolio.
  • Financial Due Diligence firms – for judging the accuracy of the valuation and financial models prepared by any other party.
  • Accounting or Chartered Accountancy Firms – for Financial Planning and Budgetingtheir own expenses and revenue.
  • Research and Outsourcing Companies – to outsource project for their clients; client can be a corporate, or an Investor

What are the Best ways to learn Financial Modeling?

DIY, Do it Yourself

The best but lengthy way to learn Financial Modelling is to learn it yourself as nothing is better than self-learning. If you’re extremely good with numbers and have analytical mindset then it is suggested that you should learn preparing models on your own by giving enough time for studying various concepts.

You can choose any sector and pick any listed company in the selected sector and start from industry study, past financials of the company, ratio analysis, management growth strategy and then go on to future projections through assumptions and other schedules. Last step is to dive into valuation part, sensitivity analysis, ratios and graphs depiction.

Take up an online Financial Modeling Course

The much faster way to learn Financial Modeling is to buy any online Financial Modelling and practice. These Modelling Courses will help you in the structuring, fundamentals, linking and formula building of a model. 

Be wise to choose a preferred Financial Modelling course and read the course contents before choosing to buy any online course.

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Join an Investment Banking (IB) firm at an entry level

The next way to learn Financial Modelling is to join any IB, Equity Research, Consulting or other companies at an entry stage either as an Intern or as a Junior Analyst. 

You will be working on the real world scenarios and live transactions which will require you to build complex models. Your job pressure and superior support will also help you to learn models much faster than required.

Frequently asked questions (FAQs) –

What is Financial Modeling?

Financial Modelling is an activity of preparing any entity’s future financials (Statement of Profit & Loss, Balance Sheet, Cash Flow Statements etc.) through estimation of numbers by taking realistic assumptions

What are the various types of Financial Models?

There are various types of financial models which exist in today’s world scenarios including Three Statement Model, Merger Model, DCF (Discounted Cash Flow Model) Model, Sum of Parts Model, LBO (Leveraged Buyout Model) Model etc.

How to learn Financial Modeling?

You can learn Financial Modeling through Online courses by The Wallstreet School, Udemy, Coursera etc.

What are the Job Prospects after Financial Modeling

A Financial Modeling expert can get Job in Private Equity Funds, Hedge Funds, Investment Banking Companies, Credit Rating Agencies, Equity or Investment Research Companies, Management Consultancy firms etc.