The document provides an introduction to financial modeling, outlining key skills necessary for effective modeling, such as proficiency in Excel and understanding financial statements. It emphasizes the importance of financial models in various finance applications, including investment banking, private equity, and corporate finance. The document also discusses the process of gathering information, building multi-year forecasts, and the significance of modeling in valuation and decision-making.

1. Introduction To Financial Modeling.
A good modeller not only knows Excel functions, tools and formats, but also is quick and efficient in
using Excel's numerous keyboard shortcuts. The main outputs of the model will be metrics used in
valuation: unlevered free cash flows (UFCF), earnings and net debt calculations. The private equity
firm sees value and significant upside in this situation given the target firm's pending patent
applications. Microsoft Excel proficiency is another prerequisite. This is a part of processing a large
commercial loan application filed by a manufacturing company which is looking to expand its
operations. The multi-year budget will be submitted to the company CEO for review.
The financial modeling process is as much an art as it is a science. Assumptions are based on the
company's historical information as well as its future plans and current market trends.
Historical and projected financial statements - income statement, balance sheet, cash flow
statement. DCF, together with comparable trading and transactions valuation will be used in the
company's ultimate valuation. The projected time period varies from one model to the next, the norm
being 5 to 10 years.
Why is financial modeling so important? It is used in a variety of finance applications such as
investment banking - initial public offerings (IPO), secondary financings, mergers and acquisitions
(M&A); corporate banking; private equity; venture capital; equity research; corporate strategic
planning and budgeting; and numerous other important applications. Below are just a few financial
modeling application examples:
An investment banker builds a financial model of a mobile telephony software company that is going
through an IPO process. These skills are further honed and advanced through the real-life work
experience of building financial models.
The financial modeling process begins with gathering information. She uses Excel financial modeling
techniques to achieve her goal. The model's emphasis is on the debt servicing ability of the company
in question. Crucial pieces of information are the company's past financial reports, management
interviews, conference call transcripts, research analyst reports, and industry publications. These
are the model's inputs. The most important outputs that the commercial bankers will look at are
debt to equity ratio, interest coverage and fixed charge coverage ratios.
An equity analyst builds a financial model of a company that his firm decided to initiate coverage on.
Financial modeling in Excel is one of the most versatile and powerful finance skills today. Private
company information can often only be obtained through direct access to the company insiders.
An typical Excel financial model will consist of the following parts:
Assumptions. Sometimes it takes years of Excel modeling to become truly proficient at this task.
By: Alan Augustinovich
Article Directory: http://www.articledashboard.com
Financial Modelling Group is an international firm specializing in finance training. In many cases

2. modellers focus on earnings, unlevered free cash flows, capital structure and debt capacity.
Scenario and sensitivity analyses are often incorporated into the models, including scenario
managers, data tables and charts.
Financial models often serve as foundation for more detailed further analysis such as valuation,
M&A merger modelling (accretion/dilution analysis), LBO analysis and Monte Carlo simulations.
So what does it take to be a good financial modeller? Accounting and finance knowledge is
compulsory. In a nutshell financial modeling is a process of building a multi-year forecast of a
company's financial statements: income statement, balance sheet and statement of cash flows. In-depth
understanding of financial statements and relationships between line items of the income
statement, balance sheet and the cash flow statement is an absolute must. The model will contain a
5-year projection of the company's income statement, balance sheet and cash flow statement and
help the company assess future financing, staffing and operational needs. The end goal of this
modeling process will be to value the per-share offering price of the company's shares once they are
listed on the stock exchange.
A credit-focused financial model is being built by the commercial lending unit of a major bank. Visit
our web site at www.finmodelling.com to learn more about our firm.
. Based on the model's results the analyst will issue buy/sell/hold recommendations on the stock
based on the relationship of his target stock price and the current market stock price.
A private equity firm is considering a 50% acquisition of an early stage pharmaceutical company that
needs capital for sustaining its research and development (R&D) program. It must be noted that this
information gathering exercise is much more challenging when modeling a private company as
opposed to a public company. The purpose for building the financial model is to determine the price
at which the private equity firm is willing to purchase the 50% stake, given the hurdle IRR (internal
rate of return) rate of 35%.
A pulp and paper company's CFO prepares a detailed multi-year budget of the company. The focus of
the model is on DCF valuation and unlevered free cash flows generated by the company. Projections
are based on historical performance and model assumptions.
Supporting schedules including working capital schedule, capital expenditures (CAPEX) schedule,
debt schedule, and tax schedule.
The model's outputs depend on the primary purpose for
building the model. Young professional involved in the
CFA program benefited from our financial modeling
courses, alongside professional accountants holding CPA,
CA, ACA, CMA and CGA designations. Our acclaimed
financial modeling and valuation seminars helped numerous current and aspiring professionals in
corporate finance, M&A, private equity, portfolio management, strategy consulting, and other
industries achieve their professional goals. Solid financial modeling training through seminars and
courses is a must for people seeking careers in many finance areas. The financial model will be used

3. in discounted cash flow (DCF) valuation. The analyst must become intimately familiar with the
company he models, its industry and competitive landscape, its plans and prospects, and the
strength of the company's management. This skill is often a sought-after add-on to well-known
financial designations such as CFA, CPA, CA, CMA and CGA