"If all great companies nowadays have implemented ERPs and Planning software, what advantage do I have in learning financial modeling in Excel?"
This is a question many professionals ponder. The answer lies in the incomparable flexibility and deep understanding of the business that financial modeling in Excel offers.
Excel allows modelers to tailor their analysis to specific needs, giving them the agility to explore various scenarios and adapt to unique business situations. Unlike rigid, out-of-the-box software, Excel empowers you to manipulate and interrogate data in ways that align with your specific analytical objectives. This flexibility is crucial for detailed, nuanced analysis.
Moreover, building financial models in Excel enhances your business acumen. It requires a deep dive into the financial and operational aspects of a company, fostering a comprehensive understanding of its mechanics. This process naturally strengthens your ability to think in systems, enabling you to see how different parts of a business interconnect and affect each other.
My proposition to you today is to get started using financial modeling to investigate a company. To learn about it from inside-out. Pick your favorite publicly traded company or choose any company to which you have access to 3 years of historical financial statements.
Use the roadmap below. The steps are just suggestions and can be changed depending on the business you are willing to understand. My suggestion if you decide to attempt this is to take it as a journey in which you get better along the way. You are not attempting to get precise with the numbers as if you were analyzing an investment. You are attempting to learn the business nuances and systems of a particular company. So, ready? Here we go!
Get the roadmap in pdf here:Roadmap.pdf
- Gather Historical Statements: Start by collecting the company's past financial data. This is the foundation of your analysis. Find listed companies' Financial Statements here.
- Perform Ratio Analysis: Use these ratios to gain insights into the company's financial health and operational efficiency. They can sometimes also guide your assumptions.
- Understand the Business Model: Dive into how the company earns and spends money, providing context to the numbers.
- Conduct Industry Analysis: Broaden your understanding by exploring the industry the company operates in, including news and competitors.
- Identify Revenue Streams: List and analyze the company's products and business units to understand and model its revenue.
- Analyze Cost Behavior: Build cost schedules for each revenue stream, refining them as more data becomes available.
- Build the Working Capital Schedule: Create assumptions based on historical statements to understand cash flow and working capital trends.
- Assess Capital Structure: Evaluate the company's historical and current capital structure to make informed projection assumptions.
- Evaluate Investment Needs: Determine the impact of planned investments on the company's growth or cost structure.
- Run Scenario Analyses: Identify potential drivers and build dynamic scenarios to understand different possible outcomes.
- Analyze the Valuation: Assemble a preliminary valuation analysis, refining it as you learn more about the company.
- Continuously Integrate New Information: Regularly update your model with fresh data and insights to maintain accuracy.