How the Financial Model Works
When it comes to the financial model preparation we need to know: what is the purpose, who is the audience and what are goals.
Here is my step by step guide:
๐ฆ๐๐ฒ๐ฝ ๐ญ: ๐๐ฒ๐ณ๐ถ๐ป๐ฒ ๐๐ต๐ฒ ๐ฃ๐๐ฟ๐ฝ๐ผ๐๐ฒ
๐ Why youโre building the model (e.g., valuation, budgeting, fundraising, scenario analysis).
๐ Identify who will use the model
๐ฆ๐๐ฒ๐ฝ ๐ฎ: ๐๐ฎ๐๐ต๐ฒ๐ฟ ๐๐ถ๐๐๐ผ๐ฟ๐ถ๐ฐ๐ฎ๐น ๐๐ฎ๐๐ฎ
๐ Collect historical financial statements
๐ Gather operational data
๐ฆ๐๐ฒ๐ฝ ๐ฏ: ๐๐ฑ๐ฒ๐ป๐๐ถ๐ณ๐ ๐๐ฒ๐ ๐๐ฟ๐ถ๐๐ฒ๐ฟ๐
๐ Determine the main factors that drive the business
๐ Use industry benchmarks and company-specific trends to guide assumptions.
๐ฆ๐๐ฒ๐ฝ ๐ฐ: ๐๐๐ถ๐น๐ฑ ๐๐๐๐๐บ๐ฝ๐๐ถ๐ผ๐ป๐
๐ Create realistic assumptions for future performance
๐ Document all assumptions clearly for transparency.
๐ฆ๐๐ฒ๐ฝ ๐ฑ: ๐ฆ๐๐ฟ๐๐ฐ๐๐๐ฟ๐ฒ ๐๐ต๐ฒ ๐ ๐ผ๐ฑ๐ฒ๐น
๐ Inputs Section: Place all assumptions and drivers in one area for easy adjustments.
๐ Calculations Section: Build formulas to project financial statements based on inputs.
๐ Outputs Section: Display key outputs like projected Income Statement, Balance Sheet, and Cash Flow Statement.
๐ฆ๐๐ฒ๐ฝ ๐ฒ: ๐ฃ๐ฒ๐ฟ๐ณ๐ผ๐ฟ๐บ ๐ฆ๐ฒ๐ป๐๐ถ๐๐ถ๐๐ถ๐๐ ๐๐ป๐ฎ๐น๐๐๐ถ๐
๐ Test how changes in key assumptions (e.g., revenue growth, cost structure) impact financial outcomes.
๐ Use data tables or scenario analysis to show best-case, base-case, and worst-case scenarios.
๐ฆ๐๐ฒ๐ฝ ๐ณ: ๐ฉ๐ฎ๐น๐ถ๐ฑ๐ฎ๐๐ฒ ๐๐ต๐ฒ ๐ ๐ผ๐ฑ๐ฒ๐น
Cross-check formulas and calculations for accuracy.
Ensure the model balances (e.g., Assets = Liabilities + Equity).
Compare projections to historical trends and industry benchmarks.
๐ฆ๐๐ฒ๐ฝ ๐ด: ๐ฃ๐ฟ๐ฒ๐๐ฒ๐ป๐ ๐ฅ๐ฒ๐๐๐น๐๐
Summarize key outputs (e.g., revenue, EBITDA, free cash flow).
Use charts and graphs to visualize trends and scenarios.
Highlight risks and opportunities based on the analysis.
If want to master this have a look at my Financial Modeling Program [Video course + Excel models]
โโGet this infographic in a high-resolution PDF.โโโโ
๐๐ฒ๐ ๐๐ผ๐บ๐ฝ๐ผ๐ป๐ฒ๐ป๐๐ ๐ผ๐ณ ๐ฎ ๐๐ถ๐ป๐ฎ๐ป๐ฐ๐ถ๐ฎ๐น ๐ ๐ผ๐ฑ๐ฒ๐น:
โ๏ธ Revenue Projections: Based on sales volume, pricing, and growth rates.
โ๏ธ Expense Projections: Fixed and variable costs tied to operations.
โ๏ธ Working Capital: Changes in accounts receivable, inventory, and accounts payable.
โ๏ธ Capital Expenditures: Investments in long-term assets.
โ๏ธ Debt and Equity: Financing activities and their impact on cash flow.
How Discounted Cash Flow Works
Understanding DCF is crucial for accurate financial valuation, but what happens when we canโt estimate it effectively?
๐๐ฒ๐ฟ๐ฒ ๐ฎ๐ฟ๐ฒ ๐๐ผ๐บ๐ฒ ๐ธ๐ฒ๐ ๐น๐ถ๐บ๐ถ๐๐ฎ๐๐ถ๐ผ๐ป๐:
โ ๐๐ป๐ฎ๐ฐ๐ฐ๐๐ฟ๐ฎ๐๐ฒ ๐ฉ๐ฎ๐น๐๐ฎ๐๐ถ๐ผ๐ป๐
Without DCF, valuations may rely on less precise methods, leading to over- or under-estimating a companyโs worth.
โ ๐ฃ๐ผ๐ผ๐ฟ ๐๐ป๐๐ฒ๐๐๐บ๐ฒ๐ป๐ ๐๐ฒ๐ฐ๐ถ๐๐ถ๐ผ๐ป๐
Lack of DCF analysis can result in misguided investments, as future cash flows arenโt properly accounted for.
โ ๐ฅ๐ถ๐๐ธ ๐ ๐ถ๐๐บ๐ฎ๐ป๐ฎ๐ด๐ฒ๐บ๐ฒ๐ป๐
Ignoring the time value of money can lead to underestimating risks and overestimating returns.
โ ๐ฆ๐๐ฎ๐ธ๐ฒ๐ต๐ผ๐น๐ฑ๐ฒ๐ฟ ๐๐ถ๐๐๐ฟ๐๐๐
Inability to present a clear, DCF-based valuation can erode confidence among investors and stakeholders.
โ ๐ฆ๐๐ฟ๐ฎ๐๐ฒ๐ด๐ถ๐ฐ ๐ ๐ถ๐๐ฎ๐น๐ถ๐ด๐ป๐บ๐ฒ๐ป๐
Without DCF, long-term financial planning may lack the rigor needed to align with business goals.
Mastering DCF isnโt just a technical skillโitโs a strategic imperative. Letโs discuss how youโve overcome challenges in DCF estimation! ๐ฌ
โGet this infographic in a high-resolution PDF.โ
Top 10 Financial Certifications
Interested in Finance Certification, here is what you can pass :
- ๐ ๐๐๐ (Chartered Financial Analyst)
- ๐ ๐๐ฃ๐ (Certified Public Accountant)
- ๐ ๐๐๐ /๐๐๐ /๐ ๐๐ (Advanced Financial Modeler / Corporate Financial Modeling / Master Financial Modeler)
- ๐ ๐๐ฅ๐ (Financial Risk Manager)
- ๐ ๐๐๐ฃ (Certified Financial Planner)
- ๐ FMVA (Financial Modeling & Valuation Analyst)
- ๐ ๐๐ ๐ (Certified Management Accountant)
- ๐ ๐๐๐ ๐ (Chartered Institute of Management Accountants)
- ๐ ๐๐ฃ๐ (Financial Planning Association or Financial Planning & Analysis)
- ๐ ๐๐๐๐ (Association of Chartered Certified Accountants)
โGet this infographic in a high-resolution PDF.โ
From EBITDA to the Cash Flow
Everyone talks about EBITDA. Banks, investors, private funds, creditors, VCsโbut when the time comes for a transaction, everyone looks at cash flow. For business owners, EBITDA is, of course, important, but what matters most is how much money they actually take home. Thatโs why I decided to create a simple graphic to highlight the most significant discrepancies between cash flow and EBITDA. Personally, I prefer cash flow. How about you?
โGet this infographic in a high-resolution PDF.โ
Leadership Skills Every CFO Must Have
Finance isnโt just about numbersโitโs about people. The best CFOs arenโt just financial experts; they are leaders who inspire, guide, and elevate their teams to success.
When leadership skills are lacking in a CFO or finance team, these problems arise:
โ Poor team communication ๐ misunderstandings and inefficiencies.
โ Decisions are made in isolation without considering team input.
โ Employees feel undervalued ๐ low engagement and productivity.
โ A lack of delegation results in micromanagement and operational overload.
โ Resistance to change and innovation ๐ slows down financial progress.
โ Strong leadership skills transform a finance department into a powerhouse of efficiency and growth.
A great CFO:
- Fostering collaboration, trust, and accountability.
- Encourages transparency and open communication
- Empowers employees by recognizing their strengths
- Mentoring people development, and delegating effectively.
- Incorporate diverse perspectives
- Creates a resilient work culture that thrives in times of uncertainty and financial challenges.
โGet this infographic in a high-resolution PDF.
โ
Besides, as announced, I launch a new course in a few weeks: FP&A Operating System.
Master FP&A: Video Course + Excel Tool
Confidently present insights to executives: Learn financial modeling, reporting, forecasting, budgeting, and data visualization โ so you can transform your data into strategic decisions.
By the end of this course, youโll have the skills to transform complex data into powerful business decisions.
Letโs join 290 students on the waitlist and get a special launch offer at an affordable price.