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Financial modeling is a must-have skill to perform at your job in accounting and finance. It can also open up opportunities for you that you otherwise wouldn’t have.
Learning how to build financial models isn’t as intimidating as it sounds. It just takes proper instruction and practice. We’ll share the best 5 ways in this post.
WHAT IS A FINANCIAL MODEL?
A financial model is a tool, typically constructed in Excel, that represents a real-world financial situation. Every financial model will have inputs, calculations, and outputs. The outputs of a financial model are analyzed and used to help make decisions.
There are a wide variety of financial models. Common models include:
Three statement model – Models the income statement, balance sheet, and statement of cash flows for a company.
Budget model – Models the budget for a company for the current year and future years.
Forecasting model – Forecasts future performance.
Discounted cash flow (DCF) model – Used to value a business based on future cash flows.
Merger Model (M&A) – Used to evaluate the feasibility and profitability of a merger or acquisition transaction.
The examples above can get pretty robust in Excel. However, there are simpler spreadsheets that are considered financial models as well. Examples include:
Present value – Calculating the present value of your rental income over 10 years.
Loan calculation – Figuring out the total amount of interest you’ll pay on your loan.
Cost savings – Calculating when the savings from your solar panels will pay themselves off.
The common denominator between these models is that they have inputs, calculations, outputs, and are used to make a decision.
A company’s CFO analyzing a budget model will use it to decide where to allocate money. An investor may use a DCF model to value a company and decide if the investment is worthwhile. You calculating the savings on your solar panels will help you decide if you should purchase them or not.
WHY FINANCIAL MODELING IS IMPORTANT
If you work in accounting or finance, or plan to, I can’t emphasize enough how important financial modeling is.
Performing your job
Financial modeling skills are essential to perform your job effectively. If you move too slow, don’t know how to do something, or don’t know where to look to learn how to do something, you are going to have a tough time.
Advancing your career
In addition to performing at your job, learning how to build financial models will help you advance your career. With more skill, you will be able to provide more value. When you provide more value, raises and promotions are likely to follow.
If you are looking for a new job, your skills in Excel could make or break your chances of landing the position.
Relieving stress and headache
Trying to build a financial model you have zero background with is frustrating and stressful. I have been in that situation before. Learning Excel and modeling up front will save you from the stress.
As you practice, you’ll also become faster and more efficient at navigating Excel and creating models from scratch. The time you’ll save from becoming efficient will save you from a lot of hassle.
Personal uses and benefits
Lastly, financial modeling is something you can use in your everyday life to help you out. You can build a model to determine your stock portfolio allocation. You can build a model to calculate your loan payment for your car. These tools can help make your life easier and help you make better decisions.
5 BEST WAYS TO LEARN FINANCIAL MODELING
1. Online courses
I believe online courses are the best way to learn financial modeling. The reasons are…
- They are relatively inexpensive.
- You can find broad courses and specific courses. Ex: A broad course is on financial modeling in general. A specific course is on M&A modeling.
- Videos allow you to pause, rewind, skip around, and speed up the lecture.
- Online courses typically come with downloadable files so you can work as you watch.
- Coursework follows a logical order so you can build off the fundamentals.
- You have lifetime access and can refer back to the course.
On your computer, you can have a window playing your online course and a window with an Excel spreadsheet open. It’s easy and efficient to follow along and implement what you are watching.
Oftentimes, when learning how to model, you will forget how to do something. Lifetime access to a course allows you to go back and refresh on topics you are rusty on. In comparison, you can’t go back to revisit an in-person college lecture (unless that was recorded).
What courses do I recommend?
I have taken courses from the following: Corporate Finance Institute (CFI) and Udemy. You don’t need to take a dozen courses to become proficient. If you can master the content in 1 to 3 courses, you will be solid.
FMVA by CFI
The Financial Modeling and Valuation Analyst (FMVA) by CFI is a course and certification. The program is highly reputable and dense with information. It is the best course I have taken to boost my financial modeling. Check out my post reviewing this course.
The FMVA certification gives you access to 26+ courses, 100’s of Excel, Word, and PowerPoint templates, and 100+ hours of video training. Check out the link below if you interested in learning more about it.
FMVA Certification (Get 10% Off With Coupon CFIPARTNER10)
With 26+ courses, you’ll get everything from the basics to advanced level material. The comprehensive curriculum will teach you financial modeling, Excel, finance, accounting, strategy, valuation, budgeting and forecasting, and presentation and visuals.
Udemy is an online learning platform where you can find courses on pretty much anything. They have a ton of options for financial modeling. For general financial modeling, I would recommend the two courses below.
- Beginner to Pro in Excel: Financial Modeling and Valuation
- The Complete Financial Analyst Course 2020
While the FMVA course is reputable and worth the money, the price is still high depending on your budget. These two courses on Udemy are $10 to $15 when Udemy is having one of its frequent sales. If you are on a budget, these are great options.
2. College courses
If your college offers classes or electives on financial modeling, I encourage you to enroll. I know it’s tempting to take the easy route with your classes, but taking a financial modeling class can set you up for an internship and full-time job out of school.
I took one class that taught me advanced Excel skills and one class that focused on financial modeling. They were the most valuable classes I took in college.
I credit those classes as the reason I landed my first few internships and full-time job. During the interviewing process, I was given an Excel test and did well because of these classes.
College courses will give you high-quality instruction and the structure and pace that will help you learn effectively.
3. On the job
Sometimes the best way to learn is on the job. At the start of a new position, you’ll likely be tasked with something you aren’t used to doing. If you are asked to build a sophisticated financial model, the first time you do it will be stressful.
In this situation, here are some things you can do to learn:
- Reference older versions or similar versions of the model you need to build
- Ask your boss or other team members for help
- Google search how to do things you aren’t familiar with
You’ll learn as you go and learning this way helps strengthen the memory of how to build the model. Next time you are asked to build this model, you will be less stressed and deliver higher quality work at a faster pace.
4. YouTube videos
There are plenty of tutorials on YouTube that can teach you how to model. The best use of YouTube is to search for specific things you are trying to learn. For example, you can search “how to build a DCF model” or “how to value a company in Excel.”
If you are looking for instruction that progresses in order from beginner to advanced, an online course is the better option.
Most YouTubers that teach financial modeling do not do so in a particular order. They will typically just make videos on any popular topic they think will get views. Keep this in mind when deciding between an online course and YouTube.
Yes, YouTube tutorials are free, but paying for a course with structured content may be worth the price for your learning and development.
5. Blog posts
Similar to learning through YouTube, online articles and blog posts are great at teaching you how to do specific things. If you Googled “how to build a DCF model” you would be greeted with a few dozen sites.
The posts on these sites are great to learn from because they can have images, gifs, videos, and text all in one place. Typically, a post will just have images and text. The images help you visualize what is going on and the text explains things clearly.
You won’t misinterpret what is said and you can follow along step by step.
TIPS FOR LEARNING AND PRACTICING FINANCIAL MODELING
Master moving efficiently through Excel
Putting in the work up front to master moving quickly through Excel will pay enormous dividends.
Learn all the shortcut keys and hotkeys. Also, learn where everything is located in Excel and what tools are available to you. You will pick this up over time, but if you can do this as soon as possible, it will make learning financial modeling much easier.
Imagine you are building a financial model to value a stock. Instead of thinking about how slow you are or how to change the formatting of a cell, you can focus on the larger task at hand, which is valuing the stock.
Don’t just read and watch videos
You can’t learn financial modeling by only reading or watching videos. You’ll learn best by doing. Reading and watching videos are fine, as long as you practice what you are consuming. Build your own models alongside the person instructing you. Implement active learning strategies.
Stay conscious of layout, design, and formatting
Layout, design, and formatting are important when working for a company. Your financial model may be 100% correct, but if it is designed and formatted poorly, your work can be misinterpreted or discarded.
Financial modeling can sound complicated and intimidating if you are completely new to it. However, there are many resources nowadays to help you quickly get caught up to speed.
In this post, we shared the best 5 ways to learn financial modeling. Modeling is a skill that will open up doors for you and make your life a whole lot easier. If there is one piece of advice I would give to those who want to work in accounting and finance, it’s that you should master using Excel and building financial models.