Financial Modeling is basically a tool that can be used for forecasting a picture of financial instrument or security or the future financial performance of the company. It is typically based on the entity’s historical performance. Preparation of detailed company-specific models is included in financial modeling. Then, these models are used for performing financial analysis and making decisions. Students who are pursuing finance are usually required to study about. For them, financial modeling homework answers are extremely helpful.
Defining Financial Modeling
Therefore, financial modeling is nothing but construction of the financial representation or either all or some aspects of the company. It can also be said to be a mathematical model of various aspects of financial health of a company. Financial model can be built on a simple paper or in Excel. However, with Excel, analysis of impact of change in variable values or various assumptions can be made, thus providing better flexibility. This is why most financial modeling homework answers include building the model on Excel.
Financial modeling depicts:
- Whether or not an organization requires additional funds.
- How would a business react to different market conditions and financial situations?
- Comparative analysis, i.e., which company would provide better returns for investments.
- Definition and analysis if risk levels
- Change in company’s direction like expansion, customer loss, etc.
- Identifying weaknesses and strength, thus finding business strategies and plans.
- This technique is used for analyzing IPOs, FPOs, and firms.
Uses of Financial Model
As stated before, the output of financial model is used for performing financial analysis and making decisions, whether outside or inside of the company. Inside the company, the financial models are used for making decisions about:
- Acquisition making (assets and business)
- Raising capitals (debts and equity)
- Business growth through entering new markets, opening new stores, etc.
- Divesting and selling business units and assets
- Forecasting and budgeting
- Allocation of capital
- Business valuation
Who builds financial models?
Your financial modeling homework answers might require you to build a financial model, but you would definitely want to know who actually builds these models. Actually, there are different professionals who build these models. Most common career tracks include investment banking, corporate development, equity research, account, and FP&A.
Learning Financial Modeling
The best way of learning financial modeling is through practice. Becoming an expert at building financial model requires years of experience. Therefore, doing is the best way of learning. A good way of practicing would be reading equity research reports, as it offers you something for comparing your results with. A helpful way of practicing is taking the historical financial of a mature company, building a flat line future model and calculating the present net value per share.
Having a solid basic understanding of the financial model is a must. Online homework help services can help you with that. When you hire such services, not only do you get financial modeling homework answers, but you also get assistance from subject matter expert whenever you want. As a student, what more could you ask for?
The aspirants who wish to learn financial modeling can be anyone who wishes to explore the financial world or get involved in making decisions related to money. These can include executives, bank managers, business strategy and planning deciders, project managers, equity researchers, research analysts, portfolio managers, people associated with investment banking, risk managers, accountants commercial bankers and everyone who is a part of a firm’s financial department.
Building a Financial Model
Building a financial model is an iterative process. You have to work with different sections until finally, you are able of tying everything together. The step by step procedure mentioned below will help you start and connect everything eventually:
- Historical Results:
The historical result of a company is where all financial models start. You can begin with the financial statements of the recent years. The assumptions for the particular historical period can then be reverse engineered by calculating things such as revenue growth rate, fixed costs, variable costs, gross margins, AP days and inventory days.
- Building Income Statement:
With the assumptions that you made, the top of income statement can be calculated with gross profit, revenue, operating expenses, and COGS. You need to wait for calculating amortization, depreciation, taxes and interest.
- Building Balance Sheet:
You can begin filling in the balance sheet by calculating inventory and accounts receivable, which are functions of COGS and revenue and also inventory days and AR days. Next, you can fill the accounts payable, which is a function of AP days and COGS.
- Supporting Schedules:
Before you complete the balance sheet and income statement, you need to create schedule for capital assets such as PP&E, debts, and interest.
- Completing Income Statement and Balance Sheet:
The income statement and balance sheet can be completed from the information in supporting schedules. On income statement, interest is linked to debt schedule and depreciation is linked to PP&E schedule. On balance sheet, closing debt balance and closing PP&E balance can be linked from schedule.
- Cash Flow Statement:
When income statement and balance sheet are complete, cash flow statement can be built through reconciliation method. Start with the income, then add depreciation and financial adjust for any change in non-cash working capital.
- DCF Analysis:
Calculating free cash flow and performing business valuation is done when the three statement models are completed. If you wish to check out certain other aspects of budget control and financial details, you can consult the blog on “budget control and expenditure homework answers.”
- Sensitivity Analysis and Scenarios:
The sensitivity analysis and scenarios can be incorporated into the model once DCF analysis is complete. This analysis is helpful in determining the impact of change in underlying assumptions on the company’s value. It is particularly useful in procedures involved in business planning and for assessing investment risk.
- Charts and Graphs:
A truly good financial analyst would be someone who clearly communicates the results. Charts and graphs serve as the most efficient way of showing the results of financial model. Mostly, the executives do not have time for looking at inner workings of model, which is why charts are extremely effective.
- Stress Testing and Auditing:
Your work is not complete when the model is done. Once it is done, it is time to stress test on extreme scenarios and check if the model shows the expected behavior. Using auditing tools is also important just to ensure accuracy.
Homework related to financial modeling often requires students to build the model. The above steps will give you an idea of how to build a financial model and help you in framing your financial modeling homework answers. Of course, if you are still facing difficulties with the topic or you are unable to solve your homework question, you can always resort to hiring online homework help services.