Process of Financial modeling
In the first blog I wrote about financial modeling, here I would like to explain the process. Just we embark on any project, in financial modeling also we will have to first clearly define the purpose of the model, whether it’s for budgeting, forecasting, valuation, or strategic planning.
It will then be followed by collecting historical data, including statements, market trends, and economic indicators. The next step would be assumptions that entail growth rates, interest rates, and market conditions.
Build the Model
Construct the model by creating linked spreadsheets that incorporate historical data, assumptions, and formulas to generate financial statements and other relevant outputs
Validate the financial model
Validate the accuracy of the model by comparing its outputs with historical data and industry benchmarks. Conduct sensitivity analyses to assess the model’s responsiveness to changes in assumptions.
Present results
Clearly present the results of the financial model, highlighting key insights and potential areas of concern. Communicate the implications of different scenarios to stakeholders.
Iterate and update
Financial models are dynamic and should be updated regularly to reflect changes in the business environment. Iterate the model as needed to ensure its relevance and accuracy.
Who builds financial models?
There are seasoned professionals working in companies who analyze financial data and prepare reports. Finance managers and directors too develop models to guide in budgeting, forecasting, and long-term financial planning for their organizations.
Now-a-days there are consultants hired by companies who project entry strategies, cost optimization, or overall business planning. Private equity firms employ professionals who assess and model potential investments. These individuals analyze the financial performance of target companies and create models to evaluate the returns and risks associated with potential investments.
Risk Analysts
In financial institutions, risk analysts build models to assess and manage financial risks. This can include models for credit risk, market risk, and operational risk
Technology and data professionals
increasing role of technology in finance, data scientists and IT professionals may collaborate with financial analysts to develop models. They ensure that data is collected, processed, and utilized effectively in the modeling process.
The work is challenging in many ways. Financial analysts gain a lot of satisfaction in helping companies make informed decisions and help a company grow. Are you interested? If so, dive deep into it and have a satisfying career.