Of course! Yes. All our templates are fully editable. All formulas, cells and sheets are completely unlocked, so you can edit anything to your liking. Each row on every sheet has a note about what that row’s calculations are trying to do, and many of the components are explained in the help files, so that you can see how I did it - and help you figure out how to change it to your liking.
Financial Model Excel
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Industry-specific Financial Model Business Plan Excel Templates
Proper financial modeling relies on methods and tools that bring rigor to the forecasting process. Oversimplifying the forecasting process can create forecasts that ignore business cycles and lead to missed investor expectations, excess inventory buildup, and overstaffing. Financial analysts need processes and tools that help them provide management with forecasts in which management can have confidence. Financial analysts can create stronger forecasts by building thorough forecasts from the ground up. Analysts often face similar problems when developing forecasts. Learning to avoid these pitfalls can help you strengthen your forecasts. Forecasting can play a key role in the budgeting process. Companies can benefit by creating flexible budgets that they can adapt to changing business conditions.
WHAT IS A FINANCIAL MODEL?
Financial model is an abstract mathematical representation how a company works (and more importantly, will work going forward). The model has inputs and outputs. The inputs are the assumptions that drive the model, things like what drives your customer acquisition cost, what your churn rates are, how much you pay people, etc. The outputs are a set of projections that show how the company will perform if the assumptions are true. One model can produce multiple sets of projections given different assumptions.
Based on a set of assumptions, a financial model is used to make smart decisions (e.g. how many sales people to hire and what to pay them). The model includes financial projections that are tied mathematically to the assumptions, which allows operators to “play with the variables” in order to understand how certain decisions might affect the future health of their company.
Key Points
- Financial models are used to forecast a company’s future financial performance and then use the forecast for a variety of purposes, including company valuation, project appraisal, acquisition decisions, debt issuance, credit ratings, and more.
- Financial models are used by bankers, accountants, consultants, economists, portfolio managers, quantitative analysts, and financial planners, as well as anyone who will benefit from forecasting the future financial performance of an organization.
- It’s essential to have a strong understanding of accounting to build a financial model. Modeling is typically learned through specialized courses or in-house training at financial services companies.
WHAT ARE THE COMPONENTS OF A SOLID FINANCIAL MODEL?
Financial models typically include pro forma versions of a company’s balance sheet, income statement, and cash flow statement. However, the emphasis on each particular financial statement may vary according to how the model will be used. Management consultants, for example, might focus more on revenue improvement and therefore focus their attention on the factors that drive revenue.
Since most people are using the financial model to communicate projections to investors, it is critical that you speak the investors’ language. They are used to having financials in Excel, so you should build your model in Excel. Google sheets is convenient for making changes and having multiple people editing, but sending an investor a model in Google sheets signals that you are not financially savvy. Investors are also used to seeing three standard statements; an income statement, a balance sheet, and a statement of cash flow. Each of these is more credible if it has BOTH the past performance and the future projections in the same spreadsheet.
Your financial model should contain a tab for each of these outputs along with an “assumptions” tab and custom detail tabs needed to help calculate the main outputs.
WHAT IS A FINANCIAL MODEL USED FOR?
Financial models are useful for many applications. Businesses commonly use them for:
Valuations and raising capital.
If you’re aiming to go public, for example, bankers will run financial models to determine how much the company is worth. You might also need toprovide models in order to get venture capital funding, loans or other types of financing.
Budgeting and forecasting.
Budget and forecasting models help finance understand the company’s performance based on input from its various components. As each program, department and business unit creates its own budget, they can then roll them up into a single overall financial model for the entire business to be used to allocate resources and predict financial results for the coming year.
Measuring possible outcomes of management decisions.
You might use a financial model to predict changes in revenue if you were to, say, raise the price of your top-selling product next year.
Credit analysis.
Investors will use financial models to determine the likelihood of your business repaying its debts, if they are to lend you funds.
WHO BUILDS FINANCIAL MODELS?
Professionals in many different areas of the financial services industry depend on financial modeling in their decision-making processes.
Investment bankers include professionals working in M&A, equity and debt underwriting, credit, and trading. A financial forecast is an important component underlying every banking transaction.
Investment managers such as mutual fund and hedge fund managers, private equity investors, and venture capitalists all use financial models as the basis for investment decisions.
Management consultants offer advice and expertise to help organizations improve business performance in terms of operations, profitability, management, structure, and strategy. A financial model provides a base case for the company, and consultants can alter assumptions to determine the optimal course of action.
Equity analysts rate stocks on a buy, sell, or hold basis that is determined through valuation models. Through various methods, including discounted cash flow analysis, analysts determine the fair value of a stock and compare it to the stock’s market value to recommend a course of action. When a company discusses financial results, issues a trading update, or provides management guidance, analysts adjust their financial models and offer an investment recommendation.
WHY INVESTORS CARE ABOUT YOUR FINANCIAL MODEL
Having a solid financial model is a significant step in communicating to investors that you are a logical thinker with a defensible plan and clearly understand your business and the levers that drive it.
Keep in mind investors are looking for the big home runs, but they are also looking at reducing their risk, the model can help them get comfortable with the risk.
FINANCIAL MODELING BEST PRACTICES
Even with all the variety and customization of financial models, there are some general industry expectations, formatting and best practices. The best models are easy to read, accurate, well-matched to the application and flexible enough to fully accommodate the complexity of the task at hand. Here are some best practices:
1) Develop an understanding of the problem, the users of the models and the overall goal of the model.
2) Unless you absolutely can’t avoid it, construct the financial model on multiple worksheets. This makes the model easier to understand and prevents user errors.
3) For increased clarity and flexibility, group your assumptions into blocks. Start with your revenue assumptions, then your balance sheet and income statement on separete tabs. Your sections will vary depending on which financial model you are using, but keep them in separate tabs that are easy to differentiate.
4) Follow standard protocols for color coding. Use a blue font on yellow cell backgroung for hard-coded numbers (assumptions).
5) Be consistent with number formats throughout your model. For instance, if you choose to identify negative dollar values with parentheses, you should always use parentheses. In Excel, you can maintain this consistency by right clicking all cells that represent financial values, select “format cells,” choose the number tab and click “accounting.” You could also choose “currency,” but this has more options and therefore more opportunities for accidental inconsistency.
6) To avoid errors and preserve the readability of the model, every value should have a cell to itself and only appear once in the sheet. You should never embed an assumption into a formula. If you do, you are likely to forget it’s there when you adjust your model, and this could significantly affect the accuracy of your output later.
7) Keep your formulas as simple as possible, and break complex calculations into multiple formulas.
8) Check your numbers and your formulas. Your model is only as good as its construction, and your output is only as good as the data you use to generate it.
9) Test your model. Try to construct scenarios to make it fail so you can refine it or at least understand its limits.