Fin Mod-1

Unit One:
Introduction to Financial Modeling

What is a financial model?
Financial Modeling
A Financial Model is the process of
is a representing in
representation in numbers of a
numbers of some company's
or all aspects of a operations in the
company's past, present, and
operations. the forecasted
future.
Uses of Financial Models
Financial models are used to estimate the value of a
business, viability of projects, sensitivity analysis,
Cash Flow Analysis, Financial Statement
preparation.
Financial Models are decision making tools
Financial modeling is the process of creating a

summary of a company's expenses and earnings in
the form of a spreadsheet that can be used to
calculate the impact of a future event or decision.
Financial Model:
A Lens to View Business
Financial Model
Example of a Financial Model
Assumption: Sales
Activities
Continue as
previous
Design a Sales
Growth Model Inputs: Q1Sales is
200000 Units.
Q2 Sales is
250000 Units.
Sales Growth Model
Sales Growth
Description 30-Jun-20 30-Jun-21 Rate
(A) (B) (C) (D)
Sales Units 200,000 250,000 25%
The financial modeler creates:
• One cell for Description , cell A
• One cell for the prior year's sales, cell B, and
• One cell for the current year's sales, cell C.
• The fourth cell, cell D, is used for a formula that divides the
difference between cell B and C by cell B.
• This is the growth formula.
• Cell D, the formula, is hard-coded into the model. Cells B
and C are input cells that can be changed by the user.
Financial Model
• A financial model is a
tool used to forecast
a business’s
financial
performance into the
future based on
historical data and
assumptions.
Why do we build financial models?
• For anyone pursuing a career in
– Finance and investment
– corporate development,
– investment banking,
– Financial Planning & Analysis (FP&A),
– equity research,
– commercial banking, or other areas of corporate finance,
building financial models is part of the daily routine.
Investment
Corporate Corporate
Project Decisions
Decisions Transactions
Company Finance
Valuation,
Mergers & Equity
Whether to
Performance, Acquisitions,
invest in a Research,
Strategic Capital
project Portfolio
Planning Raising
Management
Tutorial Notes:-
1. Investment Banking: They are Banks manly doing business of investment

consultancy in portfolio, merger and acquisitions and corporate consultancy.
They are different from commercial banks as they do not take deposits and do
not give loans.
2. FP&A: It is a set of activities involved in planning, forecasting, budgeting, and

analysis that help in major decision making of companies’ finances.
3. Equity Research: It is researching various companies value of equity shares and

advising on purchase, sell, and holding of those shares.
Types of Financial Models
1. Financial Statement Models
2. DCF Model
3. Merger Model
4. Initial Public Offering (IPO) Model
5. Leveraged Buyout (LBO) Model
6. Sum-of-the Parts Model
7. Consolidation Model
8. Budget Model
9. Forecasting Model
10. Option Pricing Model
Tutorial Notes:-
• 1. Financial Statement Model: In such models we use Balance Sheet, Income

Statement, and Cash Flow Statement to analyse and forecast future vital data.
• 2. DCF Model: DCF stands for Discounted Cash Flow. In DCF Model future cash
flows are converted into present values to know value of the company or its
share or its bond. DCF model is also used to know NPV and IRR of a project.
• 3. Merger Model: It is a model to analyse whether two or more companies can

combine together or whether an existing company can buy another company?
These models tell us if there is any increase in value possibility in Merger and
Acquisitions (M&A).
• 4. IPO Model: This model allows us to know value at which a share can be issued
to the public.
• 5. LBO Model: Word leverage here means Debt/Loan. When mainly loan is used
to buy another company it is called LBO. FM can explain viability of such
acquisitions.
• 6. Sum of the Parts Model: This model is a method to value a company by

separately calculating value of each business segment or subsidiary. Then they
are added to know total value of company.
• 7. Consolidation Model: When FM is constructed by combining financial results of

many different parts of a company. Like subsidiaries combining to form model of
parent/holding company.
• 8.Budget Model: It is used to prepare budget of a company.
• 9. Forecasting Model: It is a FM mainly constructed to forecast future financials.
• 10. Option Pricing Model: It is a model to get value of premium of an Option

Contract. It is used in derivative trading.
Hierarchy of Financial Modeling
Financial Modeling Best
Practices
Key Structure for Model Building
• Good Models clearly separate inputs, processing and
outputs.
Inputs Processing
Outputs
Should be
Should be
transparent Should be
clearly be
and broken quickly
identified and
should be
down to accessible
entered once simple steps
and be easy
to follow
Modelling Best Practices
What are modeling best practices
1. Clarify
2. Simplify
3. Plan
4. Integrity
5. Model Testing
• What problem is the model meant to
solve?
• Who is the end user?
1. Clarify
• What are users supposed to do with
the model?
2. Simplify • What is the minimum number of inputs

and outputs to build a useful model?
• Plan how inputs and outputs will be

laid out
3. Plan
• Keep all inputs in one place
• Consider using Excel tools such as:

4. Integrity “Data validation” and “Conditional
formatting”
• Use test data to ensure the model

5. Model Testing works as expected
Tension: Complex Vs. Simple Models
Financial Model Elements
Inputs
Processes Outputs
• End of Unit One……

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Unit One:

Introduction to Financial Modeling

Financial Models are decision making tools

Financial modeling is the process of creating a

1. Investment Banking: They are Banks manly doing business of investment

2. FP&A: It is a set of activities involved in planning, forecasting, budgeting, and

3. Equity Research: It is researching various companies value of equity shares and

• 1. Financial Statement Model: In such models we use Balance Sheet, Income

• 3. Merger Model: It is a model to analyse whether two or more companies can

• 6. Sum of the Parts Model: This model is a method to value a company by

• 7. Consolidation Model: When FM is constructed by combining financial results of

• 8.Budget Model: It is used to prepare budget of a company.

• 9. Forecasting Model: It is a FM mainly constructed to forecast future financials.

• 10. Option Pricing Model: It is a model to get value of premium of an Option

2. Simplify • What is the minimum number of inputs

• Plan how inputs and outputs will be

• Consider using Excel tools such as:

• Use test data to ensure the model

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