As you go through the heading, the question that arises first is, what is the difference between traditional methods of financial modelling and modern method of financial modelling? Here is what you need to understand, Financial Modeling is a task of building a model as per the current financial position of a company and it is basically designed to present a mathematical model in a more simplified version, on the basis of performance of a company. These models are generally helpful for decision-making purposes and analysis of the financial position. To make a financial model, the user has to combine some of the required smaller and simpler modules which together make a financial model.
As you go through the heading, the question that arises first is, what is the difference between traditional methods of financial modeling and modern method of financial modeling? Here is what you need to understand, Financial Modeling is a task of building a model as per the current financial position of a company and it is basically designed to present a mathematical model in a more simplified version, on the basis of performance of a company. These models are generally helpful for decision making purposes and analysis of financial position. To make a financial model, the user has to combine some of the required smaller and simpler modules which together make a financial model. There are many tools such as DCF (tool used before) is available for Financial Modeling but, as Excel is generally used for calculations, data summarizing and graphic representation, of simple data as well as complicated data, it is easier for any finance manager, risk manager, chief financial officer and financial analyst to make the financial models in Excel, with the help of financial statements available. The requirement to perform financial modeling in excel is, understanding of the key features and techniques of excel. As the financial model in Excel is built through linking the variables present in the financial statement, it is easy to change the variables and analyze the way those changes may affect the organization in the future. Benefits of Financial Modeling with Excel In the finance industry, the use of financial modeling with excel is increasing as there are many benefits of it. Some of them are as mentioned below. As the financial model is equipped with MS-Excel, it is helpful to make an attractive representation of financial statements of a company using charts, tables and bar diagrams. Any ideas or risk related to any finance project can be estimated easily and can also be reduced in a more effective way. It helps in making more reliable decisions in all the streams within an organization and not only for the financial department of an organization. As it is a quantitative analysis, it also helps a company to forecast financial statement such as balance sheets, income statements and cash flow statements. Reasons to use excel for Financial Modeling The main reason to do Financial Modeling with excel is that the models prepared in excel are easy to understand & use, it mainly focuses on the issues and are more reliable. Ease the anticipation: The main reason for developing a financial model is to get an idea about the future development of the organization. Financial modeling mainly concentrates on the anticipation of an organization’s expenses, revenues and net profits for the upcoming years. Financial models are prepared for other statements, such as the balance sheet and income statement to analyze if the present course of action is worth continuing. The Smooth running of the organization: as the organization understands its ability, it gains a competitive advantage over the competitors and if an organization is able to take good and quick data based decision, it leads to make more profits. Which results in smooth running of the business/organization. Identify opportunities: financial model forecasting identifies strength, weaknesses, opportunities and threats (SWOT) present in the market, which helps the business owner to make more reliable decisions. Successful project finance: financial models undertake both qualitative as well as the quantitative aspects of any project and often used to make better investment decisions. Therefore, financial modeling with excel is beneficial for anyone who does regular financial decision making and a mandatory activity for bankers, project finance person, investment bankers, management accountants, budget managers, equity research department.