Financial modeling involves creating an abstract representation of a real-world financial situation to project and forecast future performance based on historical data and assumptions. The primary objectives are to project and forecast a company's historical performance and assumptions about the future. Essentials to building effective models include following standard formats, maintaining proper spreadsheet design with appropriate headings, organizing assumptions documentation, and facilitating data entry in one place. Financial models are used across various industries and roles such as business planning, investment banking, credit ratings, and mergers and acquisitions.

1. Financial Modeling
Understanding Basics

2. Meaning
• “A financial model is a representation of the
present and future states of a financial entity.
A financial model is a dynamic creation and its
outcomes are all action-related: deciding,
reporting, analyzing, valuing and risk
assessing-these are just some of the outcomes
of financial modeling.”

3. • “Financial Modeling is the process by which an
organization creates a representation of some
or all of its operational aspects. The idea
behind creating such a model is to forecast
the financial position of the company based
on its historical financial parameters.”
• In simpler terms financial modeling can be
defined as the task of building an abstract
representation (a model) of a real world
financial situation.

4. Primary Objective of building Financial
Models
• To Project
• To Forecast
» Company’s Historical performance
» Assumptions about the future

5. Essentials to build Models
a) Follow Standard Formats
– Maintain appropriate no. of spreadsheets
– Using page breaks wherever required
– Writing an executive summary on the top
– Maintain proper versions of documents if future
upgradations are expected

6. b) Spreadsheet Design
– Proper protection
– Label sheets, columns, rows with appropriate
headings

7. c) Assumptions
In financial model forecasting the assumptions
play an important role. The documentation of
assumptions should be in an organized and
better way.

8. d) Data Entry
Financial models facilitate data entry at one
place.

9. Applications of Financial Models
• Business Planning
• Investment Banking
• Credit Rating
• Project Finance
• Mergers & Acquisitions
• Corporate Finance
• Equity Research

10. Users of Financial Models
• Business owners and entrepreneurs
• Finance and accounting professionals
• Financial Modelers and consultants
• Individuals for personal finance
• Investment Bankers/Portfolio Managers
• Equity Research Analysts
• Credit/Data Analysts
• Investors

11. Requisites of Financial Modeling
• Good in accounting, finance, valuation and
excel
• Knowledge regarding scope, benefits and
limitations of financial modeling
• Remember GIGO
• Model should be simple, easy to understand
and flexible to accommodate future revisions
• Time management
• Decision oriented