What is Financial Modelling? Course Details, Syllabus, Eligibility & Skills

A fundamental analytical skill in the world of money is financial modelling. The skills provide the ability to make decisions based on the quantitative nature of the finance industry. What exactly is financial analysis, what are the various types, and, more importantly, what does it take to become exceptional in the field? This paper explores the depth and provides substantial information on financial models for a finance student, for successful professionals looking to up their game, or even for sheer curiosity. However, whatever the reasons, the guide offers details required in the creation of financial models. 

What is Financial Modelling?

Financial modelling practice refers to making a mathematical representation of a financial situation or a company’s performance. Essentially, the model incorporates the company’s income and balance sheet that works to make future forecasts with historical input and assumptions, some models incorporate cash flow. 

Financial Modelling and Valuation Analyst Course Details

To update you with the quick facts on the FMVA course, here are some quick details to give you an insight on what this course is all about.

What is Financial Modelling Used For?

Financial modelling techniques are used for various purposes, including:

Investment Analysis: Evaluating potential investment opportunities.

Corporate Finance: Assisting in mergers, acquisitions, and capital raising.

Business Planning: Forecasting future revenues and expenses.

Valuation: Determining the value of a business or asset.

Risk Management: Identifying and managing financial risks.

Types of Financial Models:

There are several types of financial models, each serving a different purpose:

Discounted Cash Flow (DCF) Model: Used to value a company based on its future cash flows.

Comparable Company Analysis (CCA): Compares a company’s valuation with its peers.

Precedent Transactions Analysis: Looks at past transactions to value a company.

Merger Model (M&A): Analyzes the financial impact of a merger or acquisition.

Budget Model: Used for financial planning and budgeting.

Forecasting Model: Projects future financial performance based on historical data.

Leveraged Buyout (LBO) Model: Analyzes the feasibility of an LBO.

Advantages of Financial Modelling:

Financial modelling offers numerous advantages:

Informed Decision-Making: Provides a solid basis for making financial decisions.

Risk Assessment: Helps in identifying and mitigating financial risks.

Valuation Accuracy: Improves the accuracy of business valuations.

Strategic Planning: Assists in long-term financial planning and strategy formulation.

Performance Monitoring: Enables ongoing monitoring of financial performance against projections.

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Components of Financial Modelling:

A robust financial model typically includes the following components:

Income Statement: Details revenue, expenses, and profits.

Balance Sheet: Shows assets, liabilities, and equity.

Cash Flow Statement: Tracks cash inflows and outflows.

Assumptions: Includes projections about future performance.

Ratios and Metrics: Financial ratios to evaluate performance.

What is the Process of Financial Modelling?

The financial modelling process involves several key steps:

1. Defining Objectives: Understand the purpose of the model.

2. Data Collection: Gather historical data and relevant information.

3. Assumption Setting: Define assumptions based on market conditions and trends.

4. Model Construction: Build the model using financial modelling software.

5. Testing and Validation: Ensure the model’s accuracy by testing it.

6. Analysis and Interpretation: Analyze the results to draw insight

Financial Modelling Core Subjects:

A bachelor’s degree in Financial Modelling could take around 3 to 4 years whereas a diploma course will take around 1 to 2 years, and if you happen to choose a short-term online course then expect a learning journey as short as 2 weeks. Here are some of the major concepts you’ll be learning if you complement your CFA degree with a Financial Modeling course.

• Corporate Finance
• Portfolio Management
• Cost of Capital
• Estimation of Risk and Return of Portfolio
• Modelling the Determinants of Capital Structure
• Testing of CAPM, APM, and MFM
• Agency Conflict and Dividend Policy
• Optimal Portfolio Section (Application of Markowitz, Sharpe, Lagrange Multiplier and Utility Models)
• Construction of Corporate Governance Index
• Construction of Index Fund and Stylized Funds in the Mutual Fund
• Financial Market
• Risk Management
• Financial Market Integration (Application of Co-integration)
• Fixed Income Securities: Duration, Convexity and Value at Risk
• Efficient Market Hypothesis (Application of Time Series Models)
• Assessment of Risk in Equity market through Value-at-Risk
• Financial market Instability: Measurement and Construction of Instability
• Financial market Forecasting: Interest rate, Exchange Rate and Stock Price 
• Risk management in Insurance Companies: Solvency-I and II 
• Risk Management through Derivatives (Future, Option and Swaps)

Financial Modelling Course Eligibility:

Since the Financial Modelling Course can be pursued as either as an undergraduate degree, postgraduate degree, diploma degree or a short-term certificate course, the eligibility criteria for each of them differ. 

Here are the course-wise eligibility criteria to help you prepare better for Financial Modelling courses : 

Undergraduate: 10+2 From a recognised university

Postgraduate: Bachelor’s Degree From a recognised university

Certificate: 10+2 From a recognised university

Diploma: 10+2 From a recognised university

How to Build a Financial Model:

Building a financial model involves:

1. Spreadsheet Setup: Use financial modelling Excel or other financial modelling software.

2. Historical Data Input: Input historical financial data.

3. Assumptions and Drivers: Define assumptions and key drivers.

4. Financial Statements: Create projected financial statements.

5. Valuation Analysis: Conduct valuation analysis if needed.

6. Scenario Analysis: Run different scenarios to assess risks.

7. Review and Validate: Double-check the model for accuracy.

Who Builds Financial Models?

Financial models are typically built by:

Investment Bankers: For M&A and capital raising.

Equity Analysts: For stock valuation and investment recommendations.

Corporate Finance Professionals: For internal business planning and strategy.

Consultants: For advising clients on financial decisions.

Private Equity Analysts: For evaluating potential investments.

Financial Modelling Practices:

Effective financial modelling practices include:

Accuracy: Ensuring data and calculations are correct.

Clarity: Keeping the model easy to understand and navigate.

Consistency: Using consistent formats and formulas.

Scenario Planning: Incorporating different scenarios to test assumptions.

Documentation: Keeping detailed notes on assumptions and methodologies.

Financial Modelling Software:

Several software tools facilitate financial modelling, including:

Microsoft Excel: The most widely used tool for financial modelling.

Oracle Hyperion: For complex financial planning and analysis.

IBM Planning Analytics: For business intelligence and financial performance management.

Anaplan: For collaborative planning and modelling.

Calculations Based on Financial Model:

Financial models enable various calculations, such as:

Net Present Value (NPV): Calculating the present value of future cash flows.

Internal Rate of Return (IRR): Determining the profitability of an investment.

Earnings Before Interest and Taxes (EBIT): Assessing operational profitability.

Debt Service Coverage Ratio (DSCR): Evaluating a company’s ability to service its debt.

Benefits of Financial Models to Business:

Financial models offer several benefits to businesses:

Strategic Insights: Provide valuable insights for strategic decision-making.

Financial Planning: Aid in creating detailed financial plans and budgets.

Investment Analysis: Enhance the evaluation of investment opportunities.

Performance Tracking: This allows for tracking and comparing actual performance against forecasts.

Learn Financial Modelling:

Learning financial modelling involves:

Courses and Certifications: Enrolling in courses offered by institutions or online platforms.

Self-Study: Using books, online tutorials, and practice exercises.

Practical Application: Building models to gain hands-on experience.

Workshops and Seminars: Attending workshops for practical training.

Financial Modelling Required Skills:

Key skills for financial modelling include:

Analytical Skills: Ability to analyse financial data and trends.

Excel Proficiency: Advanced skills in Microsoft Excel.

Attention to Detail: Ensuring accuracy in data and calculations.

Financial Knowledge: Understanding of financial statements and concepts.

Problem-Solving: Ability to develop solutions based on financial data.

Scope of Financial Modelling:

Financial modelling scope is vast, covering various areas such as:

Investment Banking: For deal structuring and valuation.

Corporate Finance: For budgeting, forecasting, and financial planning.

Private Equity and Venture Capital: For investment analysis and portfolio management.

Equity Research: For stock valuation and investment recommendations.

Consulting: For advising businesses on financial strategies.

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Conclusion

Financial modelling is an essential tool in the finance business as it provides a method of analysis for financial performance and also helps to make informed decisions. Be it investment analysis, business planning or risk management, financial models provide key insights and assist in strategic decision-making. Add to that, the transferable skills have significant value when one needs to dedicate their time and investment towards studying anything Prominent among those include acquiring knowledge on financial modelling.

FAQ’s on What is Financial Modelling

Is financial modelling part of CFA?

Yes, financial modelling makes up an important part of the CFA curriculum and that too is more in those levels which give special emphasis on Financial Reporting & Analysis (FRA), Corporate Finance and Equity Valuation.

How can I do financial modelling?

Financial modelling can be learned through courses, certifications and practical applications. You can have full training in financial modelling over online platforms, universities, or professional institutions.

What is the difference between financial analysis and financial modelling?

Financial modelling takes that data and builds models out of it, predicting future financial performance by way of supporting strategic decisions.

Can a CA do financial modelling?

Chartered Accountants (CAs):  Yes, they can do financial modelling. These help create an accurate and informative financial model as their solid accounting background and knowledge of finance.

Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.