Microsoft Excel, also known as MS Excel, is one of the most popular and widely known tools used in the finance industry. It is a spreadsheet program used to organize and analyze data. From budgeting and planning to financial reporting MS Excel is a productive tool for the finance professionals. This is due to its ease of use and ability to produce results effectively, while being able to present financial information clearly and concisely. Hence, it makes sense that you should master this skill to increase your chances of getting hired.
In this article, we will explore the definition and uses of Excel Modeling, how you can create Excel models and how financial modeling skills add value to your CV.
What is Excel Modeling?
Diving deep into the topic, Excel Modeling is a widely used tool for data visualization with the help of models. It is an effective way to forecast future events and occurrences. It can also be used as a way to analyze past performances which can help organizations make better decisions and predictions.
Uses of Excel Modeling
Excel modeling is used across industries for forecasting variables and reviewing the performance of the businesses. The following are some popular uses of Excel Modeling:
- Project Management: It is used to meet deadlines and manage projects. Excel modeling can be used to review how long a task may take given the past data and the necessary adjustments required to improve the efficiency.
- Accounting: Excel models can be really efficient in the field of accounting. It helps the professionals to model different tax rates at different inputs. Excel can be used to manipulate the data to find different calculations under various scenarios.
- Financial Modeling: Excel is widely used in the finance industry to analyze the companies’ financial status. It helps businesses make investment decisions and price securities. It is also useful when companies undergo corporate transactions, like capital restructuring, buyouts, merger and acquisitions.
Getting Started: How to create a basic Excel Model?
Basic excel models consist of a combination of visualization tools, variables and formulas. Some common elements of an excel model includes:
- Input variables: values that users put in the formula which can impact the output variables. Examples include sales growth rates, interest rates, or cost projections.
- Output variables: values that are results of the excel model and depict the impact of change in metrics like net profit, cash flow, and return on investment.
- Model requirements/assumptions: any model requires a certain set of assumptions made to generate the outputs someone wants. These assumptions could be based on historical trends, industry standards, personal opinions, recent news or management expectations.
- Formulas: properly nested formulas like VLOOKUP, INDEX-MATCH and IF statements, make excel models useful to ensure accuracy and scalability.
- Charts/graphs/tables: these are data visualization tools that help the end users of the models engage and visualize the data in a productive way. They are easier for grasping complex data patterns, trends, and outliers, making the data more accessible and actionable.
Elevate Your CV with Financial Modeling Skills
One of the most common uses of excel modeling is its popularity in the financial industry also known as financial modeling. Financial modeling is a tool used to analyze historical performance and financial data to project performance.
Financial models vary greatly in terms of complexity, granularity and structure of models. The use of such models also depends on the end use of the financial model. For example, You would not create a complex DCF model for the preliminary presentation. Some of the commonly used financial models are:
- 3 Statement model: Includes analyzing and projecting the three financial statements of the company ie. income statement, cash flow statements and balance sheet. This model also projects relevant industry trends and data among others
- Discounted Cash Flow Model: It is a method used to estimate the intrinsic value of the company projecting free cash flow (FCF) using a discount rate.
- Leveraged Buyout (LBO) Model: This model is used by private equity firms that engage in leverage buyouts.
With the increasing popularity, financial modeling is a definite value add to CV. It not only demonstrates a candidate’s proficiency in handling complex data and performing analysis but also showcases their ability for strategic decision-making. Honing this skill also reflects a high level of organizational, and problem-solving skills, as well as the capability to forecast financial performance and evaluate investment opportunities. Furthermore, it indicates your readiness to tackle real-world scenarios, making you a promising candidate for investment banking, corporate finance, and consulting roles.
How to Learn Financial Modeling?
In order to create a financial model, having foundational knowledge of accountancy and financial concepts is important. Understanding financial statements and equity research reports can help you get started to build a financial model. This helps in developing a deeper understanding of concepts, like sensitivity analysis, scenario planning, and valuation techniques such as discounted cash flow (DCF) and comparable company analysis.
Mastering financial modeling comes with a lot of practice. It takes years to become an expert in building financial models and the key is really to do it on your own. Taking foundational courses such as The Wallstreet School’ s Financial Modeling and Valuation program, builds a solid base to understand concepts and skills.
Final Thoughts
To conclude, building complex microsoft excel models requires higher levels of precision. This can be achieved by following simple practices like:
- Consistency: consistent excel models include using same formatting and style makes the users understand better.
- Flexibility: excel models should be flexible for the user to change the variables and see impact on the outputs.
- Transparency: main purpose of excel models is to be clear and concise.
- Accuracy: excel models should be error free to make effective predictions about the data.
Becoming proficient in excel modeling requires years of practice and hands-on experience. Indulging in independent projects and attempting to tackle challenging real-world scenarios are keys to mastering techniques like sensitivity analysis and valuation methods.
