Financial modeling is fundamental to business operations. Not only do financial models help a business track its revenues and expenditures over time, but they can also help organizations determine the impact of decisions on future earnings.
In this way, building financial models is key to developing a sustainable business strategy.
Financial modeling is frequently used to assess a company’s stock value. For example, a Financial Analyst might use a model to determine how a decision made at the executive level might impact a publicly-traded company’s share prices. In this way, financial models can help organizations make decisions that affect the overall valuation of their company.
Businesses also use financial modeling for budgeting and forecasting purposes. In other words, a business can use models to forecast its future revenue growth (or decline) and adjust its operations accordingly. For example, if an organization is anticipating a boost in revenue, it may consider opening a new storefront or finding other ways to grow its business, such as through acquisitions. Conversely, if the organization is anticipating reduced revenue, it might find ways to save costs, such as instilling a hiring freeze or finding a cheaper material manufacturer.
Who Uses Financial Models?
Financial modeling is useful for any organization that relies upon detailed financial information to set the direction of its operations. This includes businesses in a wide variety of industries, including investment banking, real estate, and insurance, to name a few. Because financial modeling includes many different types of modeling, from budgeting to forecasting to company valuation, many professionals can benefit from learning how to build models in Excel.
In particular, Financial Analysts prepare models on behalf of the businesses they work for. Decision-makers at various levels of an organization, especially the executive level, can then consider these models when making long-term decisions for their organization. Accountants may also use financial models to help balance a business’s books, and small business owners might run their own financial models.
While financial modeling is particularly relevant for private sector organizations, it also benefits public organizations, such as local governments. These organizations rely upon forecasting to maintain a balanced budget and determine what programs and services they can offer to residents. In doing so, the government can also determine whether it needs to raise taxes in order to fund additional services (or maintain existing ones).
Financial Modeling Tools
Individuals interested in financial modeling can benefit from learning several different tools. In particular, anyone who wants to create financial models should be comfortable using spreadsheet software like Excel. That’s because Excel is used to manage large amounts of financial data, including data that has been directly exported from financial institutions (such as an organization’s bank). In particular, individuals who want to create financial models benefit from knowing how to use pivot tables in Excel and the spreadsheet software’s numerous formulas and functions, including VLOOKUP.
Another financial modeling tool is sensitivity analysis, which determines how certain independent variables may impact a specific variable in question (dependent variable). Because these analyses consider the impact of specific actions, sensitivity analyses are also known as “what-if” analyses.
Professionals can also use cash flow models as another type of financial model. Cash flow models help businesses determine their overall assets and liabilities by considering things like income, expenditures, and debts. By considering these factors, businesses can estimate what their current and future cash flows may look like. In doing so, they can make plans for the organization’s operations both now and in the future.
Many other financial modeling tools are also useful for businesses. The critical thing to keep in mind is that financial modeling tools help organizations better understand either their current or future financial health.
Learn About Financial Modeling
A great way to learn about financial modeling is through an interactive course. NYIM offers hands-on classes both in-person in its Manhattan classrooms and live online. Some of these courses are discussed in more detail below.
Those looking for an introduction to financial modeling might consider enrolling in NYIM’s Financial Analyst Training Program. This class provides students with a foundation in Excel, including how to use its formulas and functions and create Pivot Tables. Students will also learn how to conduct financial modeling, including deriving a value per share on potential investments.
NYIM’s Financial Modeling Bootcamp meets for 21 hours and teaches students the skills required to succeed as financial analysts. This includes advanced Excel, financial modeling, accounting, and corporate finance. In particular, students will learn how to create cash flow project models and conduct sensitivity analyses using Excel. Additionally, this course teaches individuals the basics of corporate finance and accounting concepts.
Those with a solid foundation in Excel might consider enrolling in NYIM’s Advanced Excel for Financial Modeling class. This class teaches advanced Excel techniques, including cash flow modeling and projections, using advanced tools for sensitivity analysis, and learning about advanced functions like VLOOKUP-MATCH and INDEX-MATCH. This course is also included as a day in the Financial Modeling Bootcamp.