Learn Financial Modeling

Financial models are used to forecast a company’s future earnings, performance, and financial health. Whether you own a business or want a job in finance, financial modeling will make an excellent addition to your skill set. Building models requires attention to detail, and it might take some time to get the hang of it. You’ll need financial literacy and a solid foundation in Microsoft Excel, so brushing up in those areas might be your starting point. From there, you can use video tutorials, textbooks, and online courses to learn how to create financial models.

Steps

Learning How to Build Models on Your Own

1. Brush up on your Quickly-Become-an-Excel-Expert. Financial modeling typically involves using Microsoft Excel to Do-Trend-Analysis-in-Excel a company’s earnings and performance. If you’re not already an advanced user, start by improving your Excel skills.
   • Search online for video tutorials and lists of shortcuts and formulas. It might be helpful to enroll in an introductory course on Excel if you don’t have any experience with it.
2. Learn how to analyse Write-a-Financial-Statement. In order to create financial models, you’ll need to understand financial statements and the data they contain. At the very least, you’ll need to understand the 3 basic financial statements, which are:
   • Read-a-Balance-Sheet, which is the overall snapshot of a business’s finances. It balances a company’s assets (things of value) with its liabilities (debt) and equity (the owner’s share or earnings). The 2 sides must always be balanced: liabilities plus equity must always equal assets.
   • Prepare-a-Profit-and-Loss-Statement measures sales and expenses within a given time period. To calculate gross profit, subtract the cost of goods sold (COGS, or how much it costs to create products) from total revenue. To calculate net profit, subtract the total operating expenses (all overhead costs, such as utilities, insurance, marketing, and legal fees) from gross profit.
   • Prepare-a-Statement-of-Cash-Flows, which compares how much money is going in and out of the business. Cash inflow includes sales revenue, loans, and investments. Cash outflow includes equipment purchased, inventory, and expenses.
3. Watch video tutorials. There are plenty of free step-by-step modeling guides on YouTube and other services. Set aside 1 to 2 hours of distraction-free time to watch a tutorial. Since building a financial model is time consuming and involves a lot of details, most video guides are at least 30 to 60 minutes long.
   • Look for tutorials that fit your needs. For instance, search for “introduction to financial modeling” or “scenario modeling basics” if you want to project your small business’s earnings and operations. You could also focus on other applications, such as investment banking modeling, real estate modeling, and other industry-specific techniques.
   • It might be helpful to use separate computers (or other electronic devices) to watch a tutorial and follow along on Excel. If you watch on one computer and have Excel open on the other, you won’t have to switch between windows.
4. Look for textbooks at your local library. Textbooks are a good option if you don’t have internet access or don’t like following online guides. You should be able to find useful textbooks at a library. You could also purchase books online or at a bookstore.
   • The standard financial modeling textbook is Financial Modeling by Simon Benninga (MIT Press, 2014).
   • Financial Analysis and Modeling Using Excel and VBA by Chandan Sengupta (Wiley, 2009) is another key text.
5. Start creating simple scenario models. Input a data set that includes a balance sheet, profit and loss statement, cash flow statement, and other financial information into a spreadsheet on Excel. Create a separate sheet of assumptions, or possible scenarios, such as changes in expenses, goods sold, price per item, and taxes. Then define formulas in the next sheet to calculate your business’s finances based on those possible scenarios.
   • You use historical data and assumptions to forecast earnings and performance and create financial goals. For instance, suppose you sell dog bones. They cost $5 to make, are priced at $8, and it took 10 employees to produce and sell 10,000 bones last year.
   • If you want your business to grow 10 percent annually, use the assumptions sheet to project how many bones you need to sell to generate 110 percent of the prior year’s revenue. If your revenue was $80,000 last year, you’d want to sell 11,000 bones and generate $88,000.
   • You could also use the assumptions sheet to figure out changes in payroll. If 1 employee produces 1,000 bones, you will need to add 1 employee per year to meet your production forecasts.
6. Use templates and case studies to practice building models. Once you’ve built a foundation, search online for “financial modeling practice case studies.” You’ll find free business data sets that you can use to create more complex models. Many case studies also include ready-made models that you can either use as templates or compare with your own.

Taking Courses in Financial Modeling

1. Look for free resources. Search online for "free financial modeling course." You can also find resources that focus on Excel and financial literacy.
   • Udemy (https://www.udemy.com/) offers free courses on financial modeling. You can also find resources there that cost less than $50 (USD).
2. Invest in online course packets or a distance learning program. Business schools and other reputable organizations offer online courses, and many are fairly inexpensive. Investing in a program can save you the hassle of having to vet free resources and organize them yourself. Additionally, you can list the course on your resume.
   • List a course on your resume under education, in your skills section, or include it in a new section along with any other special training or professional certifications.
   • Harvard Business Review offers course packets on spreadsheet modeling for around $100 (USD): https://hbr.org/store/landing/courses.
   • The Wharton School of Business offers a non-credit 5 course program on financial modeling: https://www.coursera.org/specializations/wharton-business-financial-modeling.
3. Take a class at your local college or university. While it’s the most expensive option, taking a class in person is a good option if you prefer hands on, face-to-face learning with an instructor. Search for a local community college or university, and check course offerings for introduction to financial modeling classes.

Learning Specific Modeling Techniques

1. Use basic models to plan your small business. You don’t need a complex, 40-page worksheet to forecast your small business’s growth. Focus on learning how to create simple Excel spreadsheets to set financial goals and project your business's growth.
   • For instance, model your business's growth goals to project how many units you'd need to sell to meet your revenue goals. Your model would also help you plan for space and workforce expansions.
   • You could also model changes in COGS to help you adjust your unit prices and account for potential increases in production cost.
   • A model that tracks the profit generated per long-term customer can help you set a marketing budget and new customer acquisition goals. If your average customer spends $50 per week for 5 years, they generate $13,000 in revenue. If your profit margin is 21 percent, the average customer generates $2,730 in profit over 5 years. You need to spend less than $2,730 per new customer acquisition over the course of 5 years or you'll lose money. For example, if you spend $50,000 on marketing over 5 years and acquire 18 new long-term customers, you'll barely break even.
2. Model possible scenarios to prepare for operational uncertainties. In addition to basic financial projections, you can use financial models to predict how a given scenario could affect your business. Examples include sudden changes in revenue, demand, or production costs.
   • Suppose sudden or seasonal shifts in demand are common in your industry. You could build a model to forecast how your company needs to adapt to those changes.
   • For instance, if you sell homemade candy and demand skyrockets 40 percent from October through December, you might need to rent an additional commercial kitchen and hire seasonal employees. Your model would help you plan for those seasonal increases in revenue and operating expenses.
3. Learn about industry-specific models if you need specialized knowledge. Aside from basic small business planning, there are countless forms of specialized financial models. If you want to be an investment guru, you’d want to learn about how an industry’s finances work before investing in a company within that industry. If you want to get into real estate, you’d want to familiarize yourself with real estate financial modeling.
   • Like basic financial modeling, you can find video tutorials, textbooks, and courses on specialized modeling techniques.

References

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