What to Learn Before Financial Modeling (2024)

Financial modeling is the process of forecasting how a company will perform financially over time. Most financial models are created in Microsoft Excel, where historical data is analyzed to predict how the organization can be expected to perform in the months ahead. You might worry that financial modeling will be too hard to learn. This guide will help you understand the best methods for learning financial modeling and what you should study first to make the learning process easier. This way, you’ll be successful however you choose to apply your new skills.

What is Financial Modeling?

Financial modeling is the process of evaluating a company’s past performance to predict the likelihood of various financial outcomes. Those who create financial models rely on financial forecasts to do so. The assumptions in a forecast are played out using the organization’s financial statements to predict how various statements may look in the future. Since these models are based on financial statements, they are typically generated monthly, quarterly, or yearly. It’s common for financial models to be constructed using manual data entry in an Excel spreadsheet.

Financial modeling is a valuable tool for estimating how a business or a specific project will perform based on relevant factors, as well as risk assumptions and growth, then evaluating their impact. This process helps to present a concise understanding of the variables used to make financial forecasts. Those who create financial models either build them from scratch or work with existing models, making changes based on newer data that’s become available since its creation. Because financial situations are complex and can change quickly and rapidly, financial modeling helps to create a detailed understanding of the different components.

Read more about what financial modeling is and why you should learn it.

What Can You Do with Financial Modeling?

Without well-executed financial modeling, any business operation would be analogous to a ship floating aimlessly in the sea with no navigation system. Although one could use gut instinct to steer the ship in the correct direction, there would be no guarantee that this course would be accurate. The more sound a financial model is, the less unnecessary risk a business will likely encounter. And the less likely it will be to drift aimlessly.

Financial modeling has numerous applications across industries. Strong financial models are the backbone of many businesses and are a critical component to help them continue to grow and mitigate risk. Financial models provide a way to perform a detailed analysis of all possible financial outcomes of a business decision. These models seek to avoid loss as well as increase profits.

Financial modeling is a powerful tool for a range of financial analysis tasks. It can help an organization budget for the future and analyze the company’s performance against goals and targets. It also can be used for business valuation. Financial models allow individuals to compare one company’s performance against its competitors. It is often used to analyze financial statements, ratios, and capital structure, as well as to estimate financial metrics for new projects. Not only are these models imperative for solving problems, but they are used to make decisions about future outcomes. Some of the many decisions financial models can help with are estimating a company’s projected growth, organizing its budget, choosing investments, deciding between acquisition or merger, and deciding which projects should be prioritized.

Is Financial Modeling Easy to Learn?

Financial modeling is considered a difficult field, even for those with a finance background. Understanding the root of the relationships between different financial variables used to create financial statements can be challenging. In most branches of finance, the calculations performed either look back or look forward. In financial reporting, for example, calculations are backward-looking and involve keeping track of past events. Managerial accounting, on the other hand, is forward-looking because it involves creating budgets that anticipate likely future events. However, financial modeling must be backward-looking and forward-looking at the same time. This adds a level of complexity to the modeling process.

Another contributing factor to the difficulty of financial modeling is the number of hidden assumptions that the modeler may not even be aware of. Before the subprime mortgage, financial models in the U.S. were based on the assumption that loan defaults wouldn’t likely occur in large numbers. When the subprime mortgage occurred, home prices plummeted around the country, leading to mortgage defaults. This underlying assumption had created models that did not foresee this event, which created enormous problems for individuals across the country.

What to Know Before Learning Financial Modeling

If you’re interested in learning financial modeling, there are a few skills you may consider studying first to make the process easier:

Microsoft Excel

Excel is one of the most widely used tools for those who create financial models. Excel spreadsheets are a standard tool for forecasting an organization’s financial performance into the future. Because of the complexity of this task, each business has its unique set of calculations and assumptions. Because Excel is the most customizable and flexible spreadsheet tool, it’s commonly used for financial modeling. Whereas other software tends to be rigid or too specialized for some companies’ financial modeling needs, Excel is largely considered a universal tool.

If you want to learn more about how to work with Excel, Noble Desktop has several in-person and live online Excel classes for beginners, intermediate, and advanced learners.

Accounting

A solid understanding of accounting is a must for those who want to create financial models. Concepts like accruals, depreciation, revenue recognition, and matching principle are just a few of the accounting concepts you’ll need for financial modeling. In addition, a background working with financial statements is also helpful since you will need to know how to read and recreate them.

Attention to Detail

Soft skills such as problem-solving and attention to detail are essential for those who create financial models. Because of the large volume of information you’re tasked with handling and the complexity of some models, an eye for detail is crucial to create a sound financial model. If an important variable is overlooked or an underlying assumption is not correct, this can be catastrophic and lead to incorrect forecasts. The more detail-oriented you are, the more likely you will create successful financial models.

Learn Financial Modeling with Hands-on Training at Noble Desktop

Noble Desktop offers several excellent learning options for those interested in studying financial modeling. Noble’s Financial Modeling Bootcamp covers the basics of accounting, finance, and corporate valuation. Those enrolled in this hands-on class work with Excel to create a discounted cash flow model. Students who don’t have a background in accounting or finance will be sent a short guide on terminology before class starts. All participants should have intermediate Excel proficiency as a prerequisite.

Noble’s Financial Analyst Training Program provides learners with instruction on pertinent corporate and financial concepts and how to create a full valuation model. This intensive program teaches core Excel skills, like how to work with PivotTables and shortcuts, as well as advanced Excel techniques, including cash flow projection tools and Goal Seek. All students will create an integrated, three-statement financial model based on current financial data.

Noble also offers financial modeling training courses in-person and live online. Those interested in learning more about how to use Excel for modeling can attend the Excel Bootcamp. In addition, FinTech courses such as Python for Data Science Bootcamp, Algorithmic Trading With Python, and FinTech Bootcamp are also available. Noble’s FinTech Bootcamp provides hands-on training from expert instructors in creating machine learning models, using programming languages like SQL and Python to analyze financial data, and working with various types of data, such as integers, strings, and floats. One-on-one mentoring and the option of a free course retake is included for all participants.

Key Insights

• Learning financial modeling is considered a difficult skill because it is simultaneously forward-looking and backward-looking. It can also be challenging to account for underlying assumptions when creating financial models.
• Before learning to create financial models, you may want to study accounting principles and Microsoft Excel.
• Soft skills such as attention to detail and problem-solving are also essential to financial modeling.
• A great way to learn how to create successful financial models is to enroll in one of Noble Desktop’s in-person or live online financial modeling courses.