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.
This 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,
- Introduction to Financial Modeling
- Building a layout for Project Evaluation Model – Best practices
- Building Inputs and Assumptions Sheet
- Building Projections for Project Evaluation
- Modeling the Cash Flow Statement and Projections
- Putting it all together – Final Project Evaluation Model
- 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:
- Comprehensive list of Excel Keyboard Shortcuts: Lists 97 shortcuts organized by functionality and usefulness.
- Favorite Shortcuts as voted by readers: Keyboard shortcuts shared by our readers.
- Using Mouse Effectively – Part 1 & Part 2: If you are going to use mouse, you better be productive at it.
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.
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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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.
24 Responses
I’d suggest simply using the subtotal function and filtering the data using the Win/Loss column. You get the same results and the formula is more comprehensible.
@John
That is one option.
There are times however when you want to see the whole data table or a filtered subset and still want to produce summary reports against an unfiltered field.
Is there a particular reason why you are using a comma and the unary (–) operator for the second array in the SUMPRODUCT formula? It seems to work the same if you were to string the arrays together using the asterisk (*). The advantage is that SUMPRODUCT treats the entire string of arrays as a single array.
@Mathew
Your correct, There is no difference.
I thought it may have been easier to explain this method.
Is there a way to do this on a large set of data? As in ~100,000 rows? When I try I get an error because the formula becomes too long. It says the max length of a formula is 8,192 characters. Excel 2010.
How do I incorporate a specific text within a cell for the second array. For instance, – -(C7:C13=”Apple”)
when I chose a specific text the formula does not work.
@RB
I am not sure what is the issue as if I use the sample data in the post the following work fine
Count:
=SUMPRODUCT(SUBTOTAL(3,OFFSET(C7:C13,ROW(C7:C13)-MIN(ROW(C7:C13)),,1)), –(C7:C13=”L”))
Sum:
=SUMPRODUCT(SUBTOTAL(3,OFFSET(C7:C13,ROW(C7:C13)-MIN(ROW(C7:C13)),,1)),(C7:C13=”L”)*(D7:D13))
You may want to check that there are no leading or trailing spaces in your list of Apples
I should have given a better explanation. Heres my situation. I have a column with cells filled with names like Column 1, Column 2, Pier 1, Pier 2, etc. If the cell just contained Pier and searched for that it works. But because it has other characters in the cell its not recognizing the pier. So how can I extract specific characters of a string of text in this formula?
Hopefully this was a better explanation
Hello-
This formula works pretty well for me except that it slow down excel and prevents some of my macros from working. I was wondering if there was a way to program this in VBA so that excel isn’t always trying to recalculate it. I would like to use a push of a button to get it to run then paste in a cell.
Thanks!
I am trying to sum filtered data in a column, but would want to ignore the negative values in the column. How to go about doing this?
@Akshay
Why not just add a filter to that column to only show the values greater than zero?
The negative values are required for reporting purposes, but their effect on the total is distorting the required output. Please advise.
@Akshay
I’d suggest making a post in the Chandoo.org Forums
http://forum.chandoo.org/
Attach a sample file to simplify the task
I have this working for counting and summing, however, I have a list and for the second array, I need a criteria. That is, I’m looking for b13:b200=”01.??.??” or =left((a1,2) or something like that. These types of criteria matches do not appear to work as I get a blank as a result.
Thanks!
@Bob
As your formula b13:b200=”01.??.??” looks like you are trying to check the first day of the month of the range
What about trying Day(B13:B200)=1
Hai Experts,
i understood this formula well and working fine in MS Excel 2013
but when the same am trying to place in google Spreadsheet it shows error as
“SUMPRODUCT has mismatched range sizes. Expected row count: 1. column count: 1. Actual row count: 2014, column count: 1.” and as a result #VALUE! Appears in cell.
Can anyone please help me how would i get it done in Google Spread sheet
or is there any other formula as a substitute for this.
Thank you very much.
thanks for providing this.. but why does excel keeps on prompting Circular referencing in cell D3?
@Vivek
I don’t know
I just downloaded the file and it is working fine and not showing that error
Goto the Formulas, Calculation Options Tab and check that Calculation is set to Automatic
What version of Excel and Windows are you using ?
I know that this forum is for MS Excel, but I am trying to help someone who is working in Google Sheets. The below formula works in Excel but Google Sheets returns:
“SUMPRODUCT has mismatched range sizes. Expected row count: 1. column count: 1. Actual row count: 39000, column count: 1.” and as a result #VALUE! Appears in cell.
This is the same problem asked by Srichirin above. Does anyone know if there is a formula for Google Sheets that will replicate what MS Excel does?
=SUMPRODUCT(SUBTOTAL(3,OFFSET($C$6:$C$39500,ROW($C$6:$C$39500)-MIN(ROW($C$6:$C$39500)),,1)),- -($C$6:$C$39500=H1),($D$6:$D$39500))
Trying to find a SUMPRODUCT formula that counts the word Closed by date for the last 7 days in a filtered list.
=COUNTIF(M:M,”>”&TODAY()-7) works ok for unfiltered count Column M contains Closure dates (blank if open) and Column L is Status Open or Closed
@ Terry
Please ask the question at the Chandoo.org Forums
https://chandoo.org/forum/
Please attach a sample file to ensure a quicker more accurate answer
I used this formula and worked like a charm! But, now I’ve been requested to use it but adding not one but two criteria in the same formula. For instance the sum I was doing added negative and positive numbers. I’ve been asked to use the exact same formula but adding that only positive numbers were considered… any idea on how to do this?
How exactly do you do sum filtered cells when two criteria are need not just one?
Thank you so much brother literally I have been struggling since morning to get the sum of the filtered category, however, after reading your blog attentively i got my solution, so thanks a lot once again.