Introduction to Financial Modeling using Excel [Part 1 of 6]

Posted on July 21st, 2010 in Featured , Financial Modeling , Learn Excel - 44 comments

This is a guest post written by Paramdeep from Pristine. Chandoo.org is partnering with Pristine to bring an excel financial modeling online training program for you.

Introduction to Financial Modeling - Part 1 of 6This is Part 1 of 6 on Financial Modeling using Excel

In this and next 5 posts, we are going to learn how to build a financial model to do project evaluation using Excel. The 6 parts of this tutorial are,

  1. Introduction to Financial Modeling
  2. Building a layout for Project Evaluation Model – Best practices
  3. Building Inputs and Assumptions Sheet
  4. Building Projections for Project Evaluation
  5. Modeling the Cash Flow Statement and Projections
  6. Putting it all together – Final Project Evaluation Model
  7. Join our Financial Modeling Classes

What is financial modeling?

Financial modeling is creating a complete program/ structure, which helps you in coming to a decision regarding investment in a project/ company. Now this could be on a simple piece of paper or in excel. The advantage with excel is that, even if you have calculation speed and accuracy like me (this is one place where I am like Einstien!), then also you would be able to come to the right conclusion!

Who does Financial Modeling?

Anybody dealing with any decision related to money (wish there was somebody who did not require that!). If you are involved in financial decision making/ planning related to large corporate, then you would definitely need financial modelling day in and day out. Financial modeling is a mandatory activity for investment bankers, bankers, project finance persons, equity research folks, PE & VCs.

What are the steps in building a financial model?

  • Data collection – This is where the real front end banker works. She goes to the client, collects the data like revenue, growth, investments, need for money, etc.
  • Back of the envelope calculations – Now most of the corporate guys are very hunky dory about their business. They usually think that their idea is one of a kind and is going to generate loads of mullah. Banker would sanitize their thoughts and try to figure out, if the business makes sense. Initially the thinking and analysis is very simple,
    • Does the corporate guy look sober to me?
    • How soon can I get my investment back?
    • Is the revenue that he is projecting seem greater than the market size? ;-)

    You usually need no industry knowledge for this. Just keep your eyes and ears open and put your thinking cap on!

  • Structured approach to thinking – Once the basic numbers seem reasonable (they make business sense and seem to be true as well), you have to dig deeper! This is where you need a complete financial model. And the first real step to doing that is to think of a structure of analysis. Thankfully finance has some basic theories in place and you can rely on them to proceed:
    • Cash is the king – The more cash is generated (from the operations of the business) the better is the business
    • Money today is better than money tomorrow – technically this can be called Time value of money. But it does not matter!

    Practically these are the fundamental building blocks of analysis and you have to start thinking in these terms for the analysis

  • Deciding on a Layout – Now when you start to put this plan in excel, the starting point is deciding on a layout for your financial model. Usually the following questions need to be answered:
    • How much information/ data would your model have? If its going to be large, then it might make sense to break the model in multiple sheets
    • What kind of assumptions would your model make? For better readability, we would try to keep assumptions in a different heading than the calculations and the final conclusion
    • Different fonts/ formatting for assumptions and other parts might enhance readability as well
    • Create logical modules for your model
      • Keep your P&L, Balance Sheet, cash flow statement, etc. separate
      • Even in P&L, keep the revenue generation separate from costs

One Advice for Aspiring Financial Modelers

Speed is the Key: Finally when you are dealing with tons of information, you can easily get bored. If you remember a bunch of keyboard shortcuts, then it would be very beneficial! Here are some resources to get you started:

An Example Financial Modeling Case

Now to make your life easy, we have done the first two parts for you! :) There is a case (In the attached PDF file) that lists a situation and some of the data you might need to organize your thoughts. The decision is simple, would you advice Mr. Samar to invest in design Y?

Download the case pdf from here [pdf].

Once you have read the case and analyzed the numbers try creating a model for evaluation. Remember to make the layout of your model in such a way that navigation becomes easier.
Financial Modeling using Excel - Online Classes by Chandoo.org & Pristine

What Next?

In the next installment of this tutorial, learn how to create a layout / template for our project evaluation model. We also discuss about some of the best practices to follow when building models in excel.

Join our Financial Modeling Classes

We are glad to inform that our new financial modeling & project finance modeling online class is ready for your consideration.

Please click here to learn more about the program & sign-up.

Share your Experience:

Do you build financial models? What is your experience like? What process do you follow and how do you plan the model? Do share your ideas and methods thru comments.

Added by Chandoo:

Thank you Paramdeep & Pristine:

Many thanks to Paramdeep and Pristine for making this happen. I am really enjoying this series and learning a lot of valuable tricks about financial modeling.

If you like this series, say thanks to Paramdeep. I am sure he can take any amount of appreciation without choking.

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if you are new here, consider joining my newsletter, because I can send you updates when new articles are posted (plus you get a cool e-book with 95 excel tips, free)

This article is written by Pristine. The author can be contacted on paramdeep@edupristine.com.
Pristine is an awesome training institute for CFA, PRIMA, GARP etc. They have trained folks at HSBC, BoA etc. Chandoo.org is partnering with Pristine to bring an excel financial modeling online training program for you.
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44 Responses to “Introduction to Financial Modeling using Excel [Part 1 of 6]”

  1. John N says:

    Oooh! Chandoo – are you looking to outperform the Altman Z-Score?

    I’m all ears ;)

  2. apex says:

    Many thanks, Paramdeep. Looking forward to the remaining parts of the series

  3. Clarity says:

    Thank you Paramdeep. I look forward to following the series.

    Those interested in Financial Modelling may also find this site interesting:
    http://www.fimodo.com/

  4. Rohit1409 says:

    Hi Chandoo,

    Really looking forward for this awesome financial modeling journey :)

    All the very best..

    Regards

    Rohit1409

  5. Guru says:

    Hi Chandoo,
    it seems the future is not away when we will have a new software/spreadsheet as competitor to Microsoft Office/Linux etc…….Hats Off to you..

    KEEP SMILING
    GURU

  6. Paramdeep says:

    @apex, clarity: Thanks…
    @all: I do hope that you have started creating the model for the simple case given.. Lets see, what according to you all is the best way forward. So your views on the best practices for the template for valuation?

  7. Brian Clendinen says:

    The planning process varies depending on the project and type of data I am looking at.

    If I am doing a cost impact study based on actuals, verses a cost impact study to estimate future cost, verses reviewing historical data then creating a model, verse having to review historical data, apply it to a draft model, update the model based on the draft outputs and the presentation then sometimes repeat the process a few times.

    Revisions are an absolutely necessary part of corporate financial modeling especially for the presentation sections. A good presentation will be revised multiple time. There are just to many elements which cannot be planned for, especially with ad hoc reports/models.

    Revisions are leading cause of errors, and time spent tracking down errors. The more complex the model the more important revision control is. I would be interested in a section on revision control and good methodologies to determine the effect of changes on models. That is without having to due detail review of the whole model over again.

  8. Drew says:

    Hi Paramdeep,

    I can’t wait for the continuation of this series. You have done a great job in making technical terms appear simple and easy to understand. This article is also very useful in our line of business, in fact i will be featuring this article in our site. Of course the credits will go out to you.

    Many thanks and keep it up!

    Drew

  9. @Drew: Thanks! Hope that you found the tutorials useful. Feel free to get back with any queries.

  10. […] you are building financial models or any other type of excel based decision models, chances are, there will be multiple scenarios in […]

  11. […] Here is a free financial modeling course to help you get started. Spread some love,It makes you awesome! Tweet […]

  12. […] (if you don’t want to join Financial Modeling School, we are still friends Here is a free tutorial on excel financial modeling.) […]

  13. nadeem says:

    chando bhai i m tired for looking financial modeling detail but i cant find it anyway. so plz kindly send me full detail of financial modeling from beginning levelo to final. where i learn complete modeling procedure n order to become professional

  14. @Nadeem Bhai,
    The 6 links to the tutorial at the top of this post, build a small integrated financial model step by step. We are also running a complete 8 weeks course on financial modeling (similar to excel school). But that is almost 50% complete right now. If you want to join, you can join the next batch (probably starting in Jan/ Feb)
    Feel free to get back, if you have any queries regarding the model/ steps in creating the same

  15. […] you do not wish to join our course, we are still cool. Here is a 6 part training on financial modeling & 2 part training on project finance. They are free, fresh and […]

  16. Lulama says:

    I want to learn how to build a financial model

  17. Dear Lulama,
    You can use this tutorial to learn to build a financial model. We also run a course on financial modeling and project finance modeling. The details can be obtained from:
    http://chandoo.org/wp/financial-modeling/
    You can consider joining that as well.
    I would strongly encourage you to join the newsletter to get the updates about financial modeling and the next batch starting for the course.

  18. Vivek Dharamshi says:

    I want to learn thorough excel and financial modelling thing !!! I am a chartered accountant..CAn you please suggest a detail syllabus that should be learn by me. Also suggest any classes that would cover everything in excel and financial modelling related things.. I stay in mumbai, so please suggest a class in mumbai or any books..byyee.. thanks ..

  19. Hi Vivek,
    We do conduct the financial modeling course online as well as in Mumbai. We start with the basics of excel and build a completely integrated financial model in the class. For details you can look at:
    http://chandoo.org/wp/financial-modeling/
    or
    http://www.edupristine.com/courses/financial-modeling/prisitne-fm-offering

  20. Immanuel Nashivela says:

    Please describe to me various type of financial modela and demonstrate how a model can be build.

    Regards,

  21. Dear Immanuel,
    This series of articles does exactly that. If you go step by step through the articles and create the excel sheets on your own, you will understand how to create an integrated financial model.
    Alternatively, if you are looking for video sessions, you can consider joining our course:
    http://chandoo.org/wp/financial-modeling/
    It is expected to reopen somewhere in mid july.

  22. Benjamin Burt says:

    Thanks Paramdeep this is great!

  23. […] Few months ago, we learned how to create a project valuation model in Excel as part of our series on Financial Modeling in Excel. […]

  24. Marius Bouwer says:

    Paramdeep Hi! A bit ignorant here, but let’s ask anyway. Can I access “recorded” video sessions apart from following the step by step articles?

    Thanks!

  25. @Marius: Yes, we do have a training program with recorded video sessions. If you are interested, you can enroll for the same. The details can be obtained from: http://chandoo.org/wp/financial-modeling/

  26. Rachit Sharma says:

    i want to know about the scope of financial modeling.i also want to know after doing financial modeling course what are the job prospect, like where i can found job so plz send me full detail of financial modeling from beginning levelo to final.

  27. Charsiew says:

    I am interested to join your Financial modelling class cos am involved in a new business. But I have a Macbook Air with Excel for Mac installed. Would that work with your program?

    • Dear Charsiew,
      The complete training program is built using Excel 2007 with MS windows. Though there is nothing specific to Microsoft in the training. I think a few people have joined the program and are using MAC. If you write an email to me on paramdeep @ gmail.com, I can send you the email ids of those participants and you can get to know their feedback and difficulties in using the program.

  28. Karan Chhabra says:

    This is great, when does the next batch start?

  29. Seun says:

    Paramdeep, thanks. I’m venturing into financial modelling for the first time and from the little I’ve read from your website already, I’m sure I’ll find your resources very useful; thanks once again.

  30. dikshita says:

    hie ppl…I jst wantd a small favour cn smone help me out in calculating EBITDA, along with its working,  from wipros annual report 2011-2012, link –   http://www.wipro.com/investors/annual-reports.aspx
    …PLZ plz… i am having a submission tommorow.

  31. Arthur D says:

    Nice article.

    In designing Excel Financial Models I design the user interface as friendly as possible and structuring the input variables in the workflow of the client’s operations so that they can flow through the impact of the input variables in Excel using buttons and macros and giving the model transparency.

    Cheers
    Arthur

  32. […] 4) http://chandoo.org/wp/2010/07/21/financial-modeling-introduction/  Chandoo has a great 6 step guide which goes through financial modeling from start to finish. Includes loads of pdfs to download including cheat sheets and case studies. Definitely a good place to start learning how to get to grips with financial modeling and Chandoo is well known for its Excel tutorials so if anything doesn’t make sense about the terms used to talk about formatting etc. then the answer can surely be found elsewhere on the website (and often already has hyperlinks added to skip straight to those sections as they are talked about within the financial modeling article!) […]

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