2. The integration of technical skills
with business/academic skills to create a user-
friendly decision-making tool
Here based on the past performance of the
company, we create a detailed financial model
with realistic assumptions.
Technical Skills
Excel Function
Design
Logic
Presentation
Business Skills
Accounting
Finance
Engineering
Statistics
5. Needs to tell the story of the company.
Needs to work electronically: every formula should make sense.
Needs to work well on paper (like a presentation).
Critical to have a strong plan.
Every time we build model, create a planning document.
6. Investment bankers use models for transactions involving a capital structure or
ownership.
Accountants and valuation advisors use financial models for valuation projections.
Credit analysts use financial models to determine the ability to repay debt.
Buy/sell-side research analysts use financial models to determine a buy or sell
rating on a particular security.
Management uses financial models to determine internal budgets for various
reasons.
7. Gather
•Gather historical data. You'll need at
least the last three years of financial
data for the company
Calculate
•Calculate ratios and metrics. Using
the historical data from the first step,
you'll calculate historical ratios and
metrics, like growth margins and
rates, asset turnover ratios, and
inventory changes.
Make
•Make informed assumptions. Use
assumptions to calculate future
growth margins and rates, assets
that may turnover, and projected
changes in inventory.
Create
•Create a forecast. Use all the above
data and reports to forecast the usual
accounting documents, such as future
income, balance sheets, and cash flow
statements.
Value
•Value the company. After you've
forecasted, you can now value the
company using the DCF,
or Discounted Cash Flow, method.
Review
•Review. Once you have this
information before you, use your
drafted statements to decide how
different scenarios may play out.
8.
9. IMPORTANC
E OF
ASSUMPTIO
NS
ASSUMPTIONS ARE
THE BASIC MAP FOR
CREATING ANY
MODEL.
THE ASSUMPTION
DECREASES
UNCERTAINTY.
THE FINANCIAL
MODEL IS GOOD AS
THE ASSUMPTIONS
USED TO BUILD ANY
BUSINESS MODEL.
THEY ARE KEY TO
“BUY-IN” FROM
INVESTORS,
PARTNERS, AND
EMPLOYEES.
ASSUMPTIONS HAVE
TO BE WELL
THOUGHT OUT,
RESEARCHED, AND
TESTED.
