How to learn financial modeling?

Financial Modeling

Learn financial modeling by using a spreadsheet template that introduces you to best-practice modeling structures.

One of the best ways to learn financial modeling is to take an existing model template and start off with tweaking it or by comparing your model to a similar model within the same industry. By doing so, you will realize that the good financial models all follow similar modeling principles.

Modeling Principles

  • Separating assumptions from calculations and move all hardcoded inputs in the assumption section
  • Using different colors for assumptions (blue) and calculations (black)
  • Stating the units (currency, volume, or percentage)
  • Designing the calculation flow from top to down, from left to right wherever it’s possible
  • Using the simplest formulas possible as others might have a hard time to read them
  • Avoiding macros as sometimes they break or make it unclear how the figures are calculated
  • Avoiding circular references (cash position) as the probability of mistakes increases and sensitivity analysis will become impossible
  • Structuring the financial model in sections to make it better readable
  • Structuring similar calculations always in the same way
  • Formatting the model in a visually appealing way and making it user-friendly
  • Using charts and graphs which explain whats happening in the assumed scenario
  • Printing the model in case you have a hard time to read it on screen

So all you have to do is to use a good template that applies those principles and build your model upon it.

Every model is different, but the industries work pretty similar

Each financial model is different as each business case is. However, within a certain industry one will realize that the economic models work pretty similarly. As it’s quite time-consuming to research and understand a new industry, it’s worth checking first if one can find a financial model template that already has been used for that industry. Each business is driven by how the industry works in which it operates and where its revenues come from. Therefore one has to understand what are the value drivers in terms of revenues and cost for the respective industry.

Therefore, the easiest is to find an existing financial model already done for the respective industry as it will lead you to the right questions to improve your own model.

Check the list below to find your industry-specific financial model.

Leave a Reply