A practical insight into Financial Modelling

 

What do we mean by financial modelling?

Financial modelling is a term used to describe the process of forecasting revenues and costs of each income segment of the organization along with a viewpoint on the valuation of an organization.

Financial Modelling is essentially utilized by the people in the finance industry to value potential mandates for investment, measure the success of their portfolios and benchmark their investment’s performance against the competitors.

Modelling not only helps find the valuation but also understand the feasibility of a financial instrument this, in turn, helps money/portfolio managers recommend appropriate opportunities for investment to the clients.

There is a reason why since the inception of excel, the financial industry has heavily relied on financial modelling. Its importance has remained constant and with the evolution of the technology has jumped platforms nowadays with the evolution of technology.

 Here’s how models fail and how to improve on their shortcomings.

Having talked about the legitimacy and efficiency of the financial modelling, let us now move on to its limitations. The most commonly asked question is “why these financial models could not predict the market downfall?”. Well to that question the answer is very simple “inputs”.

A financial model would be able to provide better quality output only if the inputs are of fine quality. The quality of inputs depends on multiple factors, namely: -

• The relevance of each input to the company’s business and industry

• Degree to which each input would affect the company’s operations (its revenues and margins along with the valuation)

• The inputs could vary across a company’s revenue segments and their appropriate cost heads 

(Note: Yes, this would sound a little difficult to grasp, especially to a rookie. Don’t panic we would explain these in upcoming articles)

The techniques utilized in mapping inputs also provide a great means to improving the appropriate outputs, a mere discussion with sector experts can provide an analyst with ample scope of improvement in input mapping.

With the evolving technology, artificial intelligence has also been brought into play and has proved to be a game-changer, more about it in the upcoming articles. 

 Do I need to be a financial wizard to build a financial model?

Most of the people interested in the field of portfolio management, investment banking and investment advisory ask this ques, tion “what degree of financial knowledge do I need to be able to build a model?”. Well, the short answer is “a lot”. 

There are a lot of nuances involved in building a financial model, therefore it is advised to brush up on the concepts of financial statements and appropriate schedules utilized in building them.

The knowledge requirement is not only limited to the financial aspect of it but also the industry knowledge. How does an industry function is also essential for an analyst before even starting building on the structure of the model, this is the reason why investment banks usually have a separate department for dedicated to each sector.

 To know more about financial modelling contact us at :-

https://www.aspirenowglobal.com/