What is Financial Modeling?

Financial modeling involves estimating how a project or a business will perform financially. This process considers relevant factors, makes risk and growth assumptions and evaluates their impact. By doing so, it’s possible to gain a concise understanding of where a business or a project currently stands and make financial forecasts of potential outcomes. In this overview, you’ll learn more about financial modeling, what it can do, who uses it, and how to study it to determine how to add this skill to your professional toolbox.

What Can You Do with Financial Modeling?

Without well-executed financial modeling, any business operation would be analogous to a ship floating aimlessly in the sea with no navigation system. Although one could use gut instinct to steer the ship in the correct direction, there would be no guarantee that this course would be accurate. The more sound a financial model is, the less unnecessary risk a business will likely encounter. And the less likely it will be to drift aimlessly. 

Financial modeling has numerous applications across industries. Strong financial models are the backbone of many businesses and are a critical component to help them continue to grow and mitigate risk. Financial models provide a way to perform a detailed analysis of all possible financial outcomes of a business decision. These models seek to avoid loss as well as increase profits.

Financial modeling is a powerful tool for a range of financial analysis tasks. It can help an organization budget for the future and analyze the company’s performance against goals and targets. It also can be used for business valuation. Financial models allow individuals to compare one company’s performance against its competitors. It is often used to analyze financial statements, ratios, and capital structure, as well as to estimate financial metrics for new projects. Not only are these models imperative for solving problems, but they are used to make decisions about future outcomes. Some of the many decisions financial models can help with are estimating a company’s projected growth, organizing its budget, choosing investments, deciding between acquisition or merger, and deciding which projects should be prioritized.

How Do You Download Financial Modeling Tools? How Much Do They Cost?

Financial modeling is an involved process that requires different skills and tools.

Those who create financial models primarily use Microsoft Excel for their modeling. In addition, some also work with business intelligence tools like Oracle BI to create financial models.

This application is used to organize and visualize data. Excel is available to purchase as part of a subscription that includes other Microsoft 365 apps like Teams, Word, PowerPoint, and OneDrive, among others. Anyone can purchase it directly from Microsoft’s website. Different price points are available depending on which Excel version you choose, but they range from $6/month to $22/month. If you’re interested in exploring Excel before purchasing this product, Microsoft offers a free Excel trial. 

Some Financial Modelers also rely on financial modeling software. These operating systems or programs illustrate the relationship between an organization’s finances and operation. This provides a way to study how a business responds to both favorable and unfavorable situations and how these situations would affect its bottom line. These insights offer conclusions that consider the organization's best interests no matter whether planned or unplanned events transpire. Financial modeling software has applications at different organizational levels, such as accounting, finance, controlling, purchasing, and reporting.

Oracle BI is a suite of business tools and applications created to improve the efficiency of data analytics, reporting, integration, and management. It is the first integrated, end-to-end performance management system for enterprises. This tool is used alongside other Oracle products to perform calculations and provide visual analytics for various departments like HR, sales, and supply chain. This powerful platform combines artificial intelligence technology with machine learning to make accurate and useful predictions for an organization.

Oracle BI is available for download on Oracle’s website. Although the price is not listed there, three price plans are currently available:

• Smaller businesses can purchase a single Oracle BI account for $10-50/month. Multiple accounts cost $300-$500.
• Medium-sized organizations can get Oracle BI for approximately $50-$500, depending upon their specific needs.
• Large businesses can expect to spend from $500-$10,000 for Oracle BI. 

What Are the Benefits of Learning Financial Modeling?

Financial models have a range of uses for businesses of all sizes. They can provide an overview of how much a company is worth before it goes public and whether it’s eligible for a loan or financing options. Budget forecasting models are a valuable tool for those working in finance to understand how the organization is performing based on input from different departments. Financial models also help evaluate potential outcomes of management decisions before they are executed, which can help predict any changes to revenue that may be associated with raising the price of a product. In addition, investors sometimes work with financial models to establish how likely a company is to repay its debts.

Financial models are extremely valuable for organizations because they provide a simple way to calculate performance and anticipate outcomes. Not only can these models provide insights into the risks of implementing decisions, but they can also offer a financial statement that highlights how a company is operating financially. Although there are many different kinds of financial models, they all present a comprehensive overview of how an organization performed in the past, where it currently stands, and what can be expected in the months and years ahead.

Read more about why you should learn financial modeling.

Financial Modeling Careers

Financial modeling has always played an essential role in the field of finance. Now, more jobs outside of finance require financial modeling skills. Many finance professionals, such as Investment Bankers, Private Equity Professionals, and Research Analysts, use financial modeling. The following are some of the professions in which financial modeling skills are a must:

• Investment Bankers create financial models for various tasks, such as evaluating mergers and acquisitions and the long-term impact of compounding debt. 
• Careers in private equity involve creating financial models for a leveraged buyout (LBO). 
• Individuals who work in real estate development must account for a range of variables, like financing, cash flow, and leverage. Financial modeling can help manage these variables.
• Those who work in commercial banking use financial modeling when handling deposits or loans. 
• Equity Research Analysts create reports for bank clients pertaining to equity investing. Before creating a report, an Equity Research Analyst has to analyze publicly traded companies. Financial modeling plays a vital role in this analysis.
• Venture capital companies provide companies at an early stage of development with the necessary capital for growth. When deciding which companies deserve funds, Venture Capitalists rely on tools like financial modeling to inform their decision-making process.
• Another career in which financial modeling skills can play an important role is for those who work in a startup. One of the main issues facing startups is relying on an operating model with insufficient cash flow to make it from one round of funding to the next. Startup employees with a financial modeling background can ensure their organization doesn’t encounter this common obstacle.

How to Learn Financial Modeling

If you’re interested in learning more about financial modeling, a variety of in-person and live online study options are available from top educational providers. In-person financial modeling classes are an excellent option for extroverted learners who thrive in traditional classrooms. These hands-on classes provide a computer lab with the most up-to-date software. They are also a great way to network with other learners who are studying financial modeling. Courses are taught by expert instructors, who are available to answer questions as they arise and provide guidance on complex financial theories. 

For those interested in studying financial modeling in a live environment but who don’t want to waste time or money commuting to and from campus, live online financial modeling courses are also offered. These classes provide the same quality of education as in-person study and access to an instructor in real-time but can be completed remotely from the comfort of your home or office. Participants in live online financial modeling classes complete real-world assignments and receive hands-on training from instructors with industry experience, just as they would in the classroom setting.

For individuals who need to balance their study of financial modeling with other commitments, such as full-time work or travel, self-paced coursework is for you. Unlike in-person and live online study, on-demand financial modeling classes are pre-recorded. Students can access the content at any time and from any location. Students can pause and rewind videos, which can help facilitate note-taking. Although it may be tricky to master complex financial modeling concepts like nested functions or VLOOKUP, self-paced courses are a good option for beginners looking to get started with financial modeling. In addition, self-paced material is a more affordable option. Some are even available for free from top providers.

For those who want to learn more about the stock market, Noble Desktop’s Stock Market Investing Fundamentals is a great place to start. This hour-long video is a great resource for investing fundamentals, such as what stocks and bonds are, how they are priced, and the basics of valuation. Noble also has more than 100 resources devoted exclusively to financial modeling. Noble’s Financial Modeling Training Resources & Tutorials provide a wealth of knowledge about stock options, capital markets, and foreign exchange. Noble’s Finance & FinTech YouTube playlist can also help you master specific financial modeling concepts and skills. You can also search for Financial Modeling classes close to home. 

Read the full guide on how to learn financial marketing. 

A Brief History of Financial Modeling

Financial modeling has been around in various forms for many years. To trace its more recent history, it’s helpful to look at how the spreadsheet has evolved to its current form. 

Dan Bricklin, who has become known as the Godfather of the Spreadsheet, was completing a finance course at Harvard Business School in 1978. For homework, he was assigned the task of using a ledger sheet to design a financial model for a merger. Instead of attempting to work with a paper ledger, Bricklin imagined there was an easier way to create a spreadsheet, a method that would avoid having to write and rework it each time.

Bricklin worked with his friend Bob Frankston to design VisiCalc, the first electronic spreadsheet program. VisiCalc was released in 1979. Then, in 1983, Lotus 1-2-3 was introduced. This spreadsheet program included extended capabilities for database management and performing calculations. That first year, Lotus made over $50 million in revenue. Following the public release, the software company tripled its revenue a year later.

With the advent of the electronic spreadsheet, there was no longer a need to rely on the tedious pen-and-paper ledgers of the past. It became common for investment banks to provide spreadsheet training as part of onboarding new employees. In addition, spreadsheet technology was immediately noticed by those who worked in the financial services industry because it could perform What-If calculations. Wall Street also jumped on the opportunity to work with electronic spreadsheets. The advent of the electronic spreadsheet opened an entirely new approach to high-tech investment banking in that it allowed Investors to perform recalculations by switching a number. This led to new, more informed trading. 

Then, in 1985, Microsoft released Excel. This spreadsheet program could organize data into columns and rows. These numbers could then be manipulated using formulas that let the application perform various mathematical functions. For nearly four decades, Excel has remained the industry-standard spreadsheet application. It’s widely used in many fields and industries, particularly finance and financial modeling. 

Comparable Fields

In some ways, the practice of financial modeling is comparable to the accounting field. Accountants are tasked with recording the financial transactions of a business. This involves summarizing, analyzing, and reporting every transaction to entities like regulators, oversight agencies, and tax collectors. Accountants generate brief financial statements summarizing each financial transaction during a specified accounting period. These statements are then used to provide an overview of the company’s operations, current financial position, and cash flow. 

Accountants typically have proficiency with accounting software and a well-developed understanding of financial practices and the data analytics process. While these skills take time to acquire, the training needed to be an Accountant is not as rigorous as the training required to create financial models. Those who create sound financial models generally need extensive technical training, advanced Excel expertise, and real-world experience to succeed.

Learn Financial Modeling with Hands-on Training at Noble Desktop

Noble Desktop offers several excellent learning options for those interested in studying financial modeling. Noble’s Financial Modeling Bootcamp covers the basics of accounting, finance, and corporate valuation. Those enrolled in this hands-on class work with Excel to create a discounted cash flow model. Students who don’t have a background in accounting or finance will be sent a short guide on terminology before class starts. All participants should have intermediate Excel proficiency as a prerequisite.

Noble’s Financial Analyst Training Program provides learners with instruction on pertinent corporate and financial concepts and how to create a full valuation model. This intensive program teaches core Excel skills, like how to work with PivotTables and shortcuts, as well as advanced Excel techniques, including cash flow projection tools and Goal Seek. All students will create an integrated, three-statement financial model based on current financial data.

Noble also offers financial modeling training courses in-person and live online. Those interested in learning more about how to use Excel for modeling can attend the Excel Bootcamp. In addition, FinTech courses such as Python for Data Science Bootcamp, Algorithmic Trading With Python, and FinTech Bootcamp are also available. Noble’s FinTech Bootcamp provides hands-on training from expert instructors in creating machine learning models, using programming languages like SQL and Python to analyze financial data, and working with various types of data, such as integers, strings, and floats. One-on-one mentoring and the option of a free course retake is included for all participants. 

Key Insights

• Financial modeling has been around for many years but experienced a transformation in 1978 with the advent of the first electronic spreadsheet.
• To this day, Microsoft Excel remains the most widely used tool for financial modeling. Some people also use business intelligence software like Oracle BI to model tasks.
• The field of accounting shares some similarities with that of financial modeling. Accountants record an organization’s financial transactions and make reports based on their findings.
• For those who want to learn more about financial modeling, comprehensive training is available through Noble Desktop’s in-person or live online courses.