The Basics of Financial Modeling

Description

Learn to create and understand financial models that assess the value of your company, the projects it undertakes, and its future earnings/profit projections. Follow this step-by-step guide organized in a quick-read format to build an accurate and effective financial model from the ground up. In this short book, The Basics of Financial Modeling―an abridgment of the Handbook of Financial Modeling―author Jack Avon equips business professionals who are familiar with financial statements and accounting reports to become truly proficient. Based on the author's extensive experience building models in business and finance, and teaching others to do the same, this book takes you through the financial modeling process, starting with a general overview of the history and evolution of financial modeling. It then moves on to more technical topics, such as the principles of financial modeling and the proper way to approach a financial modeling assignment, before covering key application areas for modeling in Microsoft Excel. What You'll Learn Understand the accounting and finance concepts that underpin working financial modelsApproach financial issues and solutions from a modeler's perspectiveThink about end users when developing a financial modelPlan, design, and build a financial model Who This Book Is For Beginning to intermediate modelers who wish to expand and enhance their knowledge of using Excel to build and analyze financial models Contents About the Author Acknowledgments Introduction Chapter 1: Financial Modeling: An Overview Financial Modeling: A Definition Microsoft Excel as the Modeler’s Tool Where Are Financial Models Used? The Role of the Financial Modeler Chapter 2: Financial Modeling Best Practices What Are the Best Practices of Financial Modeling? Keep the Constituents Separate Reduce Implicit Assumptions to a Minimum Avoid Using Constants Inside Formulas Let Inputs Drive Your Models, Not Calculations Have Only One Input for Each Assumption Specify Measurement Units for All Input Assumptions The Logical Flow of Calculations and Circularity Use Consistent Formulas Across Rows Avoid Mixing Time Periods of Different Lengths Break Up Long Formulas into Simple Pieces Include Automatic Error Checks Errors Explained The Reasons for Errors Unskilled Users Lack of Planning Data and Recycling Intrusions Who Will Review or Check for Errors? Real-Life Errors A Tip on Errors Catching and Trapping Errors How to Work with Errors in Models Adding Error Checks Best Practices in a Nutshell Case Study: Financial Model Gone Awry The Non-best Practice Model The Best Practice Model Chapter 3: Modeling Functions and Tools Excel Formulas and Functions for Modelers Most Used Functions IF() SUMIF(), COUNTIF(), AVERAGEIF() SUMIFS() Lookup Functions VLOOKUP() MATCH() INDEX() OFFSET() CHOOSE() Date and Time Functions NETWORKDAYS.INTL() DATEDIF() WORKDAY() EOMONTH() DAYS360() DATE() Math Functions MOD() PRODUCT() SUM() Logical Functions AND() OR() ISERROR() Functions That Use Arrays SUMPRODUCT() Working with Custom Functions or UDFs What Are UDFs? When Would You Design and Use UDFs? LINKADDRESS() EFFINDEX() SUMCOLOR() SUMTB() ISDATE() WORKSHEETSTATS() Typical Modeling Issues and How to Address Them with Functions Dealing with Text When You Need Values Case Study: Using Modeling Functions and Tools Chapter 4: Planning Your Model Introduction to the Financial Modeling Life Cycle Planning to Build a Model Is There a Clear Understanding of Cash? How Much Detail Is Required? Create Scenario Analysis and Sensitivity Analysis Assumptions: How Realistic Are They? Missing Key Elements in Financial Statements Developing a Feasibility Assessment Scoping the Modeling Project The Specification & Strategy The Benefits of Model Specification Defining Model Outputs Defining Calculations: Techniques for the Model Specifications Defining the Inputs Chapter 5: Testing and Documenting Your Model Testing the Financial Model Why Test? Who Should Test? When to Test? Types of Tests Numeric Tests Robustness Tests Environment Tests Boundary Tests Macro Tests Specification Tests Unique Formulas Tests Common Types of Errors to Test Formulas Not Copied Wrong Reference Sum Over the Wrong Range Relative and Absolute References Unit Errors Commonly Misused Functions Other Functions That Often Cause Errors The Test File Change Requests Points to Keep in Mind When Testing Providing Documentation in Models Documentation Structures Introduction Assumptions and Inputs Macro Handling Outputs Known Issues Documentation Standards Using Cell Comments Documentation Worksheets Thoughts About the Application to be Used Chapter 6: Designing and Building Your Model Managing Complexity Building Your Model Define the Modeling Tool(s) for the Job Have a Clear Approach Get Approval of the Outputs Time Scales Developing Styles and Templates Define the Structure of the Workbook Working with the Inputs Working with the Calculations Working with the Outputs Recap Planning for Errors Creating the Error Template Displaying the Errors Case Study: Planning a Financial Model The Brief About the Feasibility Study The Assessment Problem Statement Business Environment Business Vision Business Units Business Location Business Information Business Technologies Business Problem B usiness Opportunity Requirements Statement Business Drivers Business Requirements Feasibility Assessment Option One: Implementing Off-the-Shelf Software Description Assessment Results Risks Issues Assumptions Option Two: Developing a Financial Model Tool Description Assessment Results Risks Issues Assumptions Feasibility Ranking Ranking Criteria Ranking Scores Feasibility Result Chapter 7: Financial-Based Calculations How to Lay Out Your Calculations Using Best Practice Calculations Whole Range Calculations Calculating Time Periods Calculating Depreciation Database Calculations Calculating Net Present Value (NPV) Indices Calculations Chapter 8: Logical-and Structural-Based Calculations Array Calculations for Single Values Formulas That Are Based on Condition Getting the Closest Match to an Input Target Using Crosstab Calculations Applying the Right Function to Your Calculations Functions That Look Up Information Functions That Require a Condition Functions That Are Driven by Dates Functions for Precise Situations Mathematical Functions Functions Dependent on Text Calculations Involving Logical and Information Functions Linking Your Calculations to Inputs and Outputs Case Study: Math in Modeling BODMAS The Math in Modeling Making Checks in Models Adapting Math Functions Appendix A: Keyboard Shortcuts Index Other Apress Business Titles You Will Find Useful