What is Financial Modeling?

Nick Spivakov

What is Financial Modeling?

Finance modeling is a skill that every professional should have. Financial modeling is also known as financial analysis. The core essence of operation conducted in MS Excel is to forecast a business’ financial and operating performance. Analysts would forecast the data based on current operational metrics and historical financial data and management decisions. Among them are previous M&A activities or restructuring periods. A completed financial model will emphasize on company’s forecasted income statement, balance sheet, and cash flow statement. Additionally, comprehensive financial models would usually include other supporting schedules like debt schedule, share repurchase, and shareholders’ equity schedule. Consequently, having all of the calculations done, an analyst can build advanced models like Leveraged Buyout, Mergers and Acquisitions, and Discounted Cashflow Analysis, etc.

Why do we need Financial Models?

Financial models are used to perform financial analysis, internal and external decision making, and to derive price targets. In most cases, people who build those models are first-year analysts at private equity firms or investment banks. Executive Boards of various companies use these financial models to make necessary operational changes and key investment decisions. Financial models can be used for anything associated with different types of businesses or any investments that e-board members can consider. Here are the main reasons why people may need to build a financial model and what it is going to show them:

  • Raising capital
  • Management accounting
  • Financial statement analysis/ratio analysis
  • Valuing a certain type of business either for buyout or merger
  • Budgeting and forecasting
  • Capital allocation
  • Selling or divesting assets
  • Growing the business organically

Advice for Beginners in Financial Modeling

Financial modeling is the culmination of current and projected financial numbers of all aspects of a company’s business model. Financial modeling is the beginning of other modeling variations like LBO and M&A which derive other purposes in the investment spectrum. If you want to learn how to build financial models and estimate the valuation of businesses or compare those businesses to their industry peers, follow Romero Mentoring on our YouTube channel. However, if really want to perform like a Wall Street analyst and outcompete your peers, apply to our Analyst Prep Program where we educate the next generation of investment analysts.

About the Author

Nick Spivakov

Nick Spivakov is an undergraduate student at Northeastern University D'Amore-McKim School of Business studying finance and accounting. He currently serves as an Equity Research Analyst intern at Romero Research and a community leader at Romero Mentoring. Nick also serves as a Senior Analyst covering the Industrial and Utility sectors at Northeastern’s student-run investment fund with ~$200,000 AUM. In high school, he held leading positions in student organizations and charity funds. Nick’s long-term goals include improving international relations between the US and Ukraine, and helping stabilize the financial and political climate in his native country, Ukraine. He enjoys Martial Art tournaments, and reading. Nick is an Analyst Prep Program, 2020 alum.