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Financial+Modeling+Process

The financial modeling process consists of six steps: researching model requirements, identifying model type, determining components, designing the model, building the model, and conducting a quality check. There are three primary types of financial models: forecasting, reporting, and decision-making, each with specific components and requirements. Ensuring accuracy is crucial, as errors in financial models can lead to significant financial losses.

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2 views

Financial+Modeling+Process

The financial modeling process consists of six steps: researching model requirements, identifying model type, determining components, designing the model, building the model, and conducting a quality check. There are three primary types of financial models: forecasting, reporting, and decision-making, each with specific components and requirements. Ensuring accuracy is crucial, as errors in financial models can lead to significant financial losses.

Uploaded by

BenTan
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial Modeling Process

The financial modeling process can be broken down into six primary
steps:
1.Research the model requirements
2.Identify the appropriate model type
3.Determine model components
4.Design the model
5.Build the model
6.Quality check
Research Model Requirements
 Talk to the person who is going to be using the
model. What do they want? What are they going
to use it for?
 Sometimes a person may not know exactly what
they are looking for, so you’ll have to ask these
types of questions to determine your scope of
work.
 Figure out what the end result should look like
and then work backwards to figure out what type
of information you’ll need to incorporate to
achieve the desired outcome.
Identify Model Type
There are three primary types of financial
models:
1.Financial forecasting model – Used to
make a financial projections for a period of
time, usually by month, for a fiscal year.
2.Financial reporting model – Used to
compare actual financial results to a
forecast.
3.Financial decision-making model – Used
to analyze potential investment and
business opportunities.
Determine Components
Once you have identified the model requirements and
model type, the next step is to identify the model
components.
Financial forecasting model – This type of model
typically involves the forecasting of sales revenue and
expenses, so it’s important that you have sections in the
model dedicated to those activities as well as a summary
tab.
Financial reporting model – Usually already has a
financial forecast in the file and requires you to import
external data in order to compare actual results to
forecast. You’ll need a data import section, analysis
section, and reporting/dashboard section.
Determine Components Cont.
Financial decision-making model – This is
probably the most complex model type. It
generally will include a financial forecast,
financing/loan assumptions and payments,
a section that includes the investment
assumptions, as well as a section that
includes various investment metrics that
result from those assumptions.
Design the Model
 Once you have identified the model
requirements, model type, and components, the
next step is to design the financial model.
 Much like the an architect determining the
layout of a building, you must map out the model
components – how many worksheets, what
components will be contained on the
worksheets.
 You’ll also determine in this step how the
information will be linked together. PivotTable,
Lookups, VBA?
Build the Model
 The next to last step is to take your model design and to build it!
 It’s crucial in this stage that you have solid Excel skills, as you’ll be
using those skills to link the information together and perform any
calculations.
Quality Check
Most organizations make large financial decisions based
on financial models, the model must be accurate and work
properly. A bad financial model is much worse than having
no model at all.
 Imagine closing on a $20 million real estate deal and you
find out later that there was a formula error somewhere
and the real value is closer to $18 million…these types of
mistakes will put you out of business or cost you your job
and reputation.
 The model must work properly, conduct a stress test to
ensure it works!

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