How to Make a Financial Model and choose the best Company and Excel Workbook Setup?

Financial Modelling

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MarketopediaFinancial ModellingHow to Make a Financial Model and choose the best Company and Excel Workbook Setup?

Selecting a company

If you are a beginner, then consider the following –

If you are just starting with stock analysis, it is best to avoid complex companies. Reliance Industries is one example of this – even experienced investors may have difficulty modelling the company. Instead, go for something simpler to grasp.
Pick a manufacturing company over a service-oriented one; it is usually simpler to comprehend concepts such as production quantity, materials and stock levels. The ideas underlying services can sometimes be unclear.
The company should have 1-2 products that make up its revenue. When there are more products available, the degree of complexity increases. Take an example of an FMCG company: With hundreds of different items, this kind of business must manage many dependencies and can be challenging to model correctly.
When selecting an annual report from a company, it is better to opt for one that offers as much information as possible. Infosys stands out amongst its peers in this respect, assuring you of reliable data which will reduce the number of assumptions you need to make in your model – overall, a far more beneficial approach.
Make sure that the company you select is coherent in its yearly reports. Allow me to explain this. Suppose I choose a business which manufactures and sells cell phones. The business operates in India and Sri Lanka. In its initial annual report, the firm specifies the number of units sold in both nations and the revenue made from them. Nonetheless, during the second annual report, it just reveals the revenue earned but refrains from giving out information on the total units sold; an inconsistency with reporting, making it difficult to progress with the model.
Steer clear of the banking and financial services sectors, as well as NBFCs. These areas can be quite intricate with a multitude of regulatory complexities. Thus, the model we’ll learn may not be suitable for the BFSI industry. Be mindful of this.
Before selecting a company to use as a model, keep these concepts in mind. As a first example, I recommend replicating the model from this module on your own.

Throughout this module, we will have a principal model operating and several auxiliary models. You must comprehend the setting in which these different models will be employed.

The principal model – To begin, we will start with an empty excel workbook and create the model gradually. During this exercise, we will select a company and stick with it throughout the entire duration of the project.

I’ll use 1 or 2 different businesses to give extra detail in certain sections of the key model. This will help you in gaining a deeper understanding.

Consider it as learning to be an expert chef. The final goal is to churn out amazing meals, yet you must also take some time and hone your knife skills to cut vegetables quickly.

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Financial Modelling

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