Financial Modelling Introduction

Before beginning, it is important to be aware of a few points.

Financial modelling is best taught via classroom or video format, as there is often a need to go back and forth, connecting different ideas and figures.

To create a movie, shooting scenes are not usually done in a consecutive order. Songs must be recorded, action shots shot and edited, before everything can be patched together and make it appear as though the entire movie was filmed one scene after another.

Financial modelling is also similar. As we delve further, you will understand this better. 

I wanted to alert you that our learning won’t be linear. We’ll be juggling many topics at once and the things you learn in one area could carry over to a different stage. Be ready for this type of teaching structure.

We progress through Financial Modelling we realise it has more artistic qualities than scientific. A wealth of assumptions is thrown in when constructing a financial model. These presumptions tend to vary based on the user’s background and experience.

The upside is that the model we create will be highly adaptable to changes and updates; this makes financial modelling a particularly rewarding experience.

What will be covered in the learning material and what is the significance of understanding it?

When picturing a typical business, it’s understandable that there are many aspects to consider. This could range from obtaining raw materials for a manufacturing company, the personnel in charge of production, administrative staff, financials, those dealing with regulation and compliance, those in marketing and supply chain management, to distribution and research & development teams.

With such a large organisation, how can we distil it into manageable segments and gain an understanding of its operations? What is the best way to measure its performance?

Eventually, financial modelling is the key to understanding how a company operates. Ultimately, it’s all about the figures and measurements they use.

Successful operations can bring in revenue, cost management facilitates operating profits, sound financial practices keep debt levels manageable, and supply chain management improves inventory control. Additionally, a good dividend policy achieves a balance between company expansion and investors’ interests. This list could go on.

Here, we hope that by systematically looking at the numbers in the financial statements, we may gain a better understanding of the company.

When talking about understanding financial statements, I’m getting into the granular details – going line by line. Sure, ratios can provide a few insights into the business, but there’s much more that we can do to gain a better understanding of it.

Having a solid grasp of the relevant information gives us the ability to make wise investment choices.

‘Integrated Financial Modelling’ refers to the comprehensive assessment of a company’s financial performance in light of its overall business strategy.

Financial = This word indicates that we’re going to be dealing with the company’s financial statements. 

Modelling= It involves structuring a company’s financials, connecting them and applying equations to them. This combination of factors is known as a model, which produces output based on the specific input of financial statements.

Integrated= It implies that all the figures of the financial model are tied together, and they do not stand alone. As we progress in creating this financial model, you will become more aware of this concept.

The aim of any financial model is to help you arrive at an estimation of worth. What comes out of the model is the firm’s share value, once all relevant elements have been taken into account. You evaluate the stock by comparing its cost with the market rate and thus decide whether it is overpriced, undervalued or fairly valued.

The ultimate gratification can be felt when you recognise that the stock is available at a bargain price on the market – believe me!