The document provides an overview of financial modeling, emphasizing the importance of building multi-year forecasts of a company's financial statements for various applications in finance, such as investment banking, corporate banking, and private equity. Key outputs include debt servicing ratios and cash flow metrics, and proficiency in Excel is critical for success in this field. The financial modeling process involves gathering information, analyzing historical performance, and making projections based on both company-specific and market data.

1. Introduction To Financial Modeling.
DCF, together with comparable trading and transactions valuation will be used in the company's
ultimate valuation. The model's emphasis is on the debt servicing ability of the company in question.
Sometimes it takes years of Excel modeling to become truly proficient at this task.
By: Alan Augustinovich
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Financial Modelling Group is an international firm specializing in finance training. Microsoft Excel
proficiency is another prerequisite. 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.
The main outputs of the model will be metrics used in valuation: unlevered free cash flows (UFCF),
earnings and net debt calculations. This skill is often a sought-after add-on to well-known financial
designations such as CFA, CPA, CA, CMA and CGA. 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. Crucial pieces of information
are the company's past financial reports, management interviews, conference call transcripts,
research analyst reports, and industry publications. Solid financial modeling training through
seminars and courses is a must for people seeking careers in many finance areas. A good modeller
not only knows Excel functions, tools and formats, but also is quick and efficient in using Excel's
numerous keyboard shortcuts. Young professional involved in the CFA program benefited from our
financial modeling courses, alongside professional accountants holding CPA, CA, ACA, CMA and
CGA designations. These are the model's inputs. 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. This is a part of processing a large commercial loan application filed by
a manufacturing company which is looking to expand its operations. 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. 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.
Financial modeling in Excel is one of the most versatile and powerful finance skills today. 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. 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. These skills are
further honed and advanced through the real-life work experience of building financial models.

2. The financial modeling process begins with
gathering information. 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. 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
financial model will be used in discounted cash flow (DCF) valuation. 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. In many cases 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. 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. The focus of the model is on DCF valuation and unlevered free cash flows generated by
the company. The private equity firm sees value and significant upside in this situation given the
target firm's pending patent applications. 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. The model will contain a 5-year

3. projection of the company's income statement, balance sheet and cash flow statement and help the
company assess future financing, staffing and operational needs. 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. She uses Excel financial modeling techniques to achieve her goal. It must
be noted that this information gathering exercise is much more challenging when modeling a private
company as opposed to a public company. 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. Visit our web site at www.finmodelling.com to learn more about our firm.