What is Financial Modelling?

Financial modelling is the practice of using data to make detailed mathematical charts and spreadsheets that can be used for further business analysis.

Did you know? An entry-level financial modeller earns around GBP 45,000 yearly with salaries rising to GBP 76,500 later, depending on their years of experience. (Source: Talent.com)

Financial modelling is becoming a popular career choice, with the Bureau of Labor Statistics predicting an 8% growth rate in job roles, resulting in almost 29,000 new jobs by 2032. (Source: (U.S.A)BLS)

It is often used alongside business analytics and data analysis, with approximately 25% of leading firms worldwide confirming the use of data-driven decisions. (Source: S&PGlobal )

With this rising demand for financial experts skilled in financial modelling, investing in education or upskilling in this field can yield a high return on investment (ROI).

In this blog post, we will explore financial modelling intricacies, its components, significance, and future trends, providing guidance on getting started and advancing in the industry.

What is Financial Modelling?

Financial modelling involves creating detailed summaries of a company’s expenses and earnings in Excel workbooks or spreadsheets.

This practice is extensively used in business analytics where real-time financial data is used in creating easy-to-understand pie charts, graphs, and presentations for clients and stakeholders.

Financial modelling helps you track your financial habits and business status. It can also be used to predict future events and help businesses be ready for any investments or losses in the future.

A basic financial model includes the following elements:

The 3-Statement financial model:

•       Income statement
•       Balance sheet
•       Cash-flow statement

This is the most basic financial model used to determine a company’s revenue, debt, cash flow, expenses, and other transactions.

What is the Purpose of Financial Modelling?

At its core, financial modelling serves as a tool to provide a clear and structured representation of a company's financial performance. It goes beyond simple calculations, aiding in strategic planning, risk assessment, and decision-making by offering insights into potential outcomes based on different scenarios.

 

What are the Components of Financial Modelling and Financial Modelling Techniques?

The basic components of financial modelling and financial modelling techniques are listed below:

1.   Historical data analysis: Financial modelling begins with a thorough examination of past financial data to identify patterns and trends, laying the foundation for future projections.

 

2. Assumptions and drivers: This involves incorporating key variables that impact financial projections, ensuring a realistic and dynamic model.

 

3.   Financial statements: Creating detailed income statements, balance sheets, and cash flow statements forms the core of financial modelling, providing a comprehensive view of a company's financial health.

 

4.   Scenario analysis: Evaluating different scenarios helps assess the impact on financial outcomes under various conditions, allowing for better risk management.

 

 Types of financial models

Here are three of the most common types of financial models in the industry:

1. Budget model: Involves forecasting future revenues, expenses, and profits, providing a roadmap for financial planning.

2. Valuation model: Concerned with determining the value of a company or its assets, which is crucial for investors and strategic decision-making.

3. Forecasting model: Predicts future financial trends based on historical data, aiding in proactive decision-making.

 

What are Some Examples of Financial Modelling?

•   Discounted Cash Flow (DCF) Model: This model is used to value a company based on its projected future cash flows, a key method in corporate finance.
•   Merger and Acquisition (M&A) Model: Assessing the financial impact of mergers or acquisitions is crucial for strategic decision-making.

 

What is the Importance of Financial Modelling in Business?

• Informed decision-making: Enables businesses to make strategic decisions backed by data, ensuring a calculated approach to growth and development.

• Risk management: Identifies potential risks and allows businesses to develop mitigation strategies, safeguarding financial stability.

• Investor confidence: Builds confidence among investors by providing a clear and transparent financial picture, crucial for attracting investments.

 

What are some tools and software used in financial modelling?

• Microsoft Excel: Widely used for its versatility and powerful data analysis features, financial modelling with excel remains the go-to tool for financial professionals and accountants.

• Financial modelling software: Specialised tools like Tableau, Power BI, or dedicated financial modelling software cater to specific needs, offering advanced features.

 

What are the Future Trends in Financial Modelling?

1. Integration of AI and machine learning: The future of financial modelling involves utilising advanced technologies for more accurate predictions and enhancing forecasting capabilities.

2. Increased automation: Streamlining the financial modelling process through automation, improving efficiency and reducing manual errors.

 

What are Some Career Opportunities in Financial Modelling?

 

1. Financial analyst: Involves analysing financial data and preparing reports, a crucial role in guiding strategic financial decisions.

2. Investment banking analyst: Encompasses supporting financial transactions and deal structuring, vital for investment decisions.

Other popular financial modelling jobs include financial manager, equity research, research analyst, real estate agent, business analyst, credit analyst, corporate finance, and consultant. (Source: iimskills)

Important to note: While a financial modelling course alone may not be enough to secure a managerial role within a company, having the skills in this in-demand field can help you climb the corporate ladder. You can become a financial manager with a thorough understanding of financial operations and business administration.

 

What is the Financial Modelling Process?

The financial modelling process involves:

 

• Defining the objective: Clearly outlining the purpose of the model, setting the stage for what needs to be achieved.

• Gathering data: Involves collecting relevant financial and non-financial data, ensuring the model is based on accurate and comprehensive information.

• Building the model: Creating a structured mathematical representation, incorporating components such as historical data, assumptions, and financial statements.

 

How Do I Start Financial Modelling?

Financial modeling is a field accessible to both entry-level graduates and experienced professionals. You can undergo training in industry tools used in financial modeling to secure higher-paying jobs or consider pursuing an MBA specialising in financial operations to advance further up the corporate ladder.

To embark on your journey in financial modelling, you can start with these two steps:

1. Learn Excel skills: Mastering Excel is fundamental for financial modelling, providing a robust platform for creating intricate models.
2. Take online courses: Institutions like the London School of Business and Finance offer comprehensive financial modelling courses, providing structured learning modules online. Research your options and make a decision that suits your ambitions.

 

In conclusion, mastering financial modelling is not just a skill, it's a gateway to informed decision-making, effective financial management and strategic planning. Whether you're a student exploring the financial landscape or a mid-career professional aiming for advancement, understanding financial modelling opens a world of possibilities.

 

Consider enrolling in the Post Graduate Certificate in Financial Modelling programme offered at the London School of Business and Finance UK. (LSBF) 

The course is available online and on-campus and can help you gain the knowledge, opportunity, and exposure in this field. LSBF is also a certified member of the AACSB and is a quality business education provider.