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5 Reasons Which Make Financial Modelling Important For Mba'sBy Author: michel kein
Financial Model, which makes an important factor in analysis of a company's financial analysis, is nothing but an MS Excel representation with many tabs in the spread sheet. Having two components including historical and projected data, the tabs in the MS Excel file consist of income statement, balance sheet, cash flow statement, and depreciation schedule, debt pay down, sensitivity analysis, valuation, assumptions and ratio analysis.
Financial analysts use financial model to dissect and evaluate a company's past performance and make forecasts about its performance in future. For some jobs like investment banking, equity research, fixed income research, credit rating and risk management, one of the elementary requirement is ability to build financial model.
Now one question that arises in everyone's mind is, if Financial Modelling is so crucial, why isn't it taught to MBA students? Though there are many top B-schools, which make financial modelling part of their curriculum, but it is not detailed. There are some gaps as well like the topics covered are not relevant as per the latest developments in the industry, minimal industry exposure of the faculty and most importantly, the subject is taught without MS Excel, which is the lifeblood of Financial Modelling.
Whether you are an MBA, CA, CFA or planning to make successful career in Finance, here are 5 reasons to make you understand why you should learn financial modelling:
Less practical knowledge in MBA/CFA/CA:
MBAs, CFAs and CAs might have good understanding of Financial Modelling in theoretical terms, but they lag behind when it comes to using MS Excel to analyse companies. From these courses you only get good theoretical knowledge of important terms like what is cash, what is balance sheet, what is debt pay down, how does a company raise funds etc.
But leading companies like Ernst & Young (E&Y) and Deutche Bank don't want you to know the definition of the terms; rather they want you to decide the fair stock price of any company with the help of all their financial statements. This gap can be covered only when you learn the things from an industry expert, who lives and breathes financial modelling every day.
Fundamental understanding of how a company functions:
By learning advanced financial modelling, you will be able to understand basics of how a company functions. Thorough understanding of this opens up gate of great opportunities in corporate finance. Basic understanding of financial model will help you to know that "Revenue" is not just an item in an income statement, rather it is an accumulation of 10-20 different such items like sales pipeline, chances of sales conversion, sales channels, average revenue per user (ARPU) etc.
Technical skills you possess as an MBA/CFA/CA is your competency to perform. A thorough corporate analysis is mentioned below:
• Prepare an Assumptions sheet with all the data drivers required for the model. This data later helps in projecting the financial statements
• Prepare an income statement with comprehensive lined items covering revenue roll-up, hiring plan impacting salary, inventory affecting cost of goods sold, capital expenditure affecting depreciation etc.
• Prepare a Balance sheet comprising of accounts receivable and payables calculation using outstanding days, working capital computation, deferred revenue, deferred tax assets and liabilities, effect of shareholders equity on net income etc.
•Prepare a Cash flow statement that links the Balance Sheet and the Income Statement. It further categories cash flow into operations, investment and finances.
• Prepare a sensitivity analysis table to test company's future performance under different scenarios including best, worst and average case
• Valuation of company with the help of different valuation techniques such as discounted cash flow, comparable trading, P/E, weighted average cost of capital, capital asset pricing model etc.
Great career opportunities:
Financial modelling knowledge is required in almost every corporate finance role. So, learning of financial modelling paves way for a wide variety of career opportunities for you like investment banker, equity research analyst, fixed income research analyst, risk management, portfolio analysis etc. By learning financial modelling, you can easily take responsibility of any job role that has to deal with a company analysis. Because there is lack of skilled people who have thorough understanding of how to build financial model, you will get an advantage.
Become a MS Excel expert:
Training of financial modelling will also help you to learn how to use MS Excel to prepare various spread sheets for analysis. MS Excel is one of the most important and common tool used in any business today. For an aspiring finance analyst, understanding of MS Excel is the stepping stone.
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