Preface

Financial modeling is an essential tool for financial decision-making. Today, as professional disciplines continue to overlap, the discipline of financial modeling continues to take center stage. Anyone who works with data needs a structured way to capture, analyze, and display information in order to assist the decision-making process.

Financial modeling meets these requirements by creating integrated mathematical models that can be modified and updated with just a few keystrokes.

Virtually all decisions converge to monetary considerations that will ultimately benefit from mathematical representation in a financial model. This is why financial modeling is so popular with students and seasoned professionals alike.

In this book, with the benefit of years of feedback from students across the globe, I have tried to present concepts and methods in a clear and uncluttered fashion using several illustrations that will take you step by step through various procedures. I have also introduced different case studies and examples of financial models to illustrate the diversity of the subject.

After reading this book, you will be able to approach any financial decision-making situation with confidence. You will understand the importance of preparing a template, isolating assumptions, growth drivers, and integrating your model to facilitate modification and analysis.

Who this book is for

This book is for students and professionals with an interest in financial analysis, data analysis, accountancy, and valuation, and anyone involved in the financial decision-making process.

What this book covers

Chapter 1, An Introduction to Financial Modeling and Excel, examines various definitions of financial modeling and discusses the basic components of a financial model. It also looks at the limitations of Excel and explains why Excel is still the ideal tool for financial modeling.

Chapter 2, Steps for Building a Financial Model, takes you through the process of building a discounted cash flow financial model, from discussions with the client to ratio analysis and valuation. It adopts a step-by-step approach, with each step explained in detail.

Chapter 3, Formulas and Functions – Completing Modeling Tasks with a Single Formula, explains the use of formulas and functions in Excel with examples of lookup functions, utility functions, pivot tables, and charts. It also looks at a number of new functions introduced in Excel for Microsoft 365.

Chapter 4, The Referencing Framework in Excel, takes a detailed look at the referencing framework in Excel. It explains how this important concept helps to speed up your work as a modeler, providing welcome relief from the boredom and grind of repetitive calculations that are synonymous with modeling.

Chapter 5, An Introduction to Power Query, as the title says, introduces this game-changing feature of Excel that addresses a vital function in financial modeling: getting and transforming data from a wide range of sources. The chapter is reinforced with the inclusion of two real-world case studies.

Chapter 6, Understanding Project and Building Assumptions, takes you through discussions with management/clients, building assumptions, and identifying growth drivers.

Chapter 7, Asset and Debt Schedules, takes you through the preparation of these essential schedules and connecting them with the balance sheet and profit and loss account.

Chapter 8, Preparing a Cash Flow Statement, emphasizes the importance of cash in financial analysis and valuation, with elements of this statement explained in detail.

Chapter 9, Ratio Analysis, talks about the importance of ratio analysis to investment analysts by exposing trends and relationships not immediately noticeable in the financial statements.

Chapter 10, Valuation, brings the discounted cash flow model to an end with descriptions of absolute and relative methods of valuation.

Chapter 11, Model Testing for Reasonableness and Accuracy, attempts to mitigate the uncertainty inherent in financial models with sensitivity and scenario analyses.

Chapter 12, Case Study 1 - Building a Model to Extract a Balance Sheet and Profit and Loss from a Trial Balance, speaks to accountants and auditors who carry out this task frequently. This process is automated with a model that can be updated from year to year with just a few keystrokes.

Chapter 13, Case Study 2 - Creating a Model for Capital Budgeting, explains the importance of capital budgeting and, with the help of a comprehensive case study, builds a model that you can adapt and use.

To get the most out of this book

The book assumes a basic knowledge of Excel. A basic understanding of accounting terms is also useful but not essential.

You will need a Microsoft 365 subscription to have access to the new Excel functions referred to throughout the book. This book assumes minimal knowledge of mathematics, accounting, and statistics. Where concepts in this discipline arise, I have endeavored to explain the topics in simple terms and use examples and illustrations to ensure a thorough understanding of the concepts.

If you are using the digital version of this book, we advise you to type the code yourself or access the code from the book's GitHub repository (a link is available in the next section). Doing so will help you avoid any potential errors related to the copying and pasting of code.

Download the color images

We also provide a PDF file that has color images of the screenshots and diagrams used in this book. You can download it here: https://static.packt-cdn.com/downloads/9781803231143_ColorImages.pdf.

Conventions used

There are a number of text conventions used throughout this book.

Code in text: Indicates code words in text, database table names, folder names, filenames, file extensions, pathnames, dummy URLs, user input, and Twitter handles. Here is an example: “Mount the downloaded WebStorm-10*.dmg disk image file as another disk in your system.”

A block of code is set as follows:

html, body, #map {
 height: 100%; 
 margin: 0;
 padding: 0
}

When we wish to draw your attention to a particular part of a code block, the relevant lines or items are set in bold:

[default]
exten => s,1,Dial(Zap/1|30)
exten => s,2,Voicemail(u100)
exten => s,102,Voicemail(b100)
exten => i,1,Voicemail(s0)

Any command-line input or output is written as follows:

$ mkdir css
$ cd css

Bold: Indicates a new term, an important word, or words that you see onscreen. For instance, words in menus or dialog boxes appear in bold. Here is an example: “Select System info from the Administration panel.”

Tips or Important Notes

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Get in touch

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