In your opinion, what makes a good Financial Model?
Before we dive deep, let us first understand what exactly is a financial model, and why do businesses rely so much on a good financial model? Financial models are nothing but spreadsheets that have past historical financial data of the business that helps in forecasting the future financial performance and assessing risk and returns. Hence it is an indispensable finance toolkit for every company. Small businesses and start-ups need a financial model which is basic, easy to understand, concise, and demonstrates an uncomplicated approach. Taking an example of the retail sector, these small businesses and start-ups may want to adopt a more customer-centric approach, and this is exactly where a financial model would help. Financial models would help in determining key metrics like how many customers can be targeted in a particular market? What percentage can be potentially acquired from this target audience? And the most important metric in which all the stakeholders would be interested is how much profit can be earned from this set of customers.
Here are the factors that need to be kept in mind while creating an excellent financial model. Before the financial model is created, one must keep the objectives in mind for which the financial model is being created.
1) The first and foremost thing while building a financial model is that it must be built professionally and strategically. A sound financial model should include three financial statements namely profit and loss, cash flow statement, and balance sheet. At the very initial stage, small businesses may or may not require a balance sheet, but later, at some point or the other, the stakeholders and investors may ask for it as a part of their diligent process.
2) The second very important thing is that a good financial model must be able to forecast the future for three to five years and on a monthly basis. The weekly forecast will be too detailed, and the yearly one would be too vague. Striking a balance here is the key.
3) The third most important thing while creating a financial model is that it should be maintained in one single spreadsheet. Linking multiple pages would create further confusion and ultimately lead to complications as it would contain very important data about the business operations. A point to be noted here is that if it doesn’t impact the costs or the revenues, then it shouldn’t be included in the financial model.
4) A good financial model must be able to quantify the story being told. For example, if the sale is increasing, then it must also specify the reasons for the same. It should be able to define whether it is because of the increased marketing spend? Or is it because of investment in the growth marketing team or the sales team?
5) A great financial model should also take into consideration appropriate assumptions. These assumptions show an investor how well one is aware of the entire business. It must also clearly state the key variables that drive the performance and the key operations to be focused on and accordingly invest necessary resources. It must also state the factors which can be ignored.
To conclude, a great financial model should be such that it helps in raising money. In simple terms, the financial model used for fundraising should also be used by those who spent time creating it and making use of it operationally. The same financial model would then be used at the time of presenting it to the board of directors. This would ultimately help in setting the tone for the overall governance process and would also help in judging the quality of the assets going forward.
So, is it worth doing the Financial Modeling course in India? Let us find out:
The answer to this question is a very big yes. The main reason is financial models are highly demanded, primarily because it helps in acquiring skills and expertise that would help in facing any tough scenarios. Hence the training must be focused on handling real-life situations in the field of Investment Banking or the field of Equity Research. Even though the Financial Modeling course should be practical, the theory also helps in building a very strong base.
Coming to the institute that provides a Financial Modeling course with placement is EduPristine. EduPristine is one of the leading training providers in the field of Accounting, Finance, Analytics, and Marketing. The focus is on student success and the pass rates, and hence, they have a dedicated career services team that keeps updating the web portal regularly with new opportunities.
Are you now ready and excited to build a successful career in Financial Modeling? You must go for it without any second thought as the application of financial modeling is widespread, which not only helps in deriving the intrinsic value of a particular stock but also helps predict cash flows along with the internal rate of return, also known as IRR. Financial modelingwill also help in opening many doors. All the best and happy learning.
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