5 Reasons Why MBA’s Should Learn Financial Modelling

A Financial model is nothing but a MS Excel representation of a company’s financials. The financial model is 1 large MS Excel file, that has many tabs including – Income Statement, Balance Sheet, Cash Flow Statement, Depreciation Schedule, Debt Paydown, Valuation, Sensitivity Analysis, Ratio Analysis and Assumptions. Each of these tabs will have 2 components – historical and projected data.

Financial models are typically used by Financial Analysts to dissect and analyze a company’s performance and make predictions about the company’s future. Being able to build a financial model is a fundamental requisite for jobs in Investment Banking, Equity Research, Fixed Income Research, Credit Rating and Risk Management.

So if this a fundamental requisite then why is it not taught in MBA classrooms? To be sure, many MBA colleges include some kind of financial modeling in their curriculum – especially the top B-schools have a reasonable coverage of this topic. However there are significant gaps in the knowledge delivered. The faults lie in one or more of these areas – 1) Not detailed enough 2) Not relevant to latest developments in the industry 3) Faculty has minimal industry exposure so students just get lip service 4) Financial modeling is taught without MS Excel!! The last reason is the most bizarre of them all.

So if you are a MBA, CFA, CA or if you just want have a successful career in Finance, here are 5 reasons why you should learn financial modeling –

1. Your MBA / CFA / CA is Too Theoretical –

Yes, I hate to break the bad news to you, but bankers are tired of interviewing MBA’s, CFA’s and CA’s who don’t know the first thing about how to use MS Excel to analyze companies. All of these courses teach you outstanding theory and definitions about things like – what is cash, what is a debt paydown, how does a company raise money etc.

But what companies like Goldman Sachs and Deutsche Bank need you to know is how do you determine the fair stock price of a company given all their financial statements. You will agree there is a huge gap here that has to be crossed. The best way to learn this sis from an industry professional who is living and breathing a financial model everyday.

2. Fundamentally Understand How a Company Works

If you learn advanced financial modeling the right way, you will appreciate the fundamentals of how a company works. Once you understand this thoroughly your scope for growth in Corporate Finance is virtually limitless. You will learn that “Revenue” is not just 1 line item in an income statement, but a roll-up of 10-20 different items such as sales pipeline, probability of sales conversion, sales channels, ARPU (average revenue per user) etc.

You will learn that “Marketing Expense” is not just 1 line item, but a combination of detailed data such as channel wise budgets, conversion funnels, customer acquisition cost etc.

3. Get Technical

The only technical skill you have as a MBA/CFA/CA is your ability to perform detailed corporate analysis such as the following –

– Build an Assumptions sheet were you put in all the data drivers for your model. This is the data that you will use later for projecting the financial statements.

– Build an Income Statement with detailed lined items covering revenue roll-up, inventory affecting cost of goods sold, hiring plan affecting salary, capex affecting depreciation, liabilities affecting interest expense etc

– Build a Balance Sheet that includes components such as – working capital calculations, accounts receivable and payables calculation using days outstanding, deferred revenue, deferred tax assets, deferred tax liability, how shareholders equity is affected by net income etc

– Build a Cash Flow Statement that connects the Balance Sheet with the Income Statement. Categorize cash flows into operational, investing and financing.

– Build a detailed debt paydown schedule – analyzing in details each of the debt tranches the company uses to finance its operations. Understand the various interest rates and financing terms and how all of it affects the income statement and cash flow statement.

– Build a Sensitivity Analysis table where you can test how the company will perform under different scenarios – best case, worst case and average case.

– Value the company using valuation techniques such Discounted Cash Flow, Comparable Trading, P/E, Capital Asset Pricing Model, Weighted Average Cost of Capital etc.


4. Opens Up Many Career Options

Almost any corporate finance role requires financial modeling knowledge. This means that if you learn financial modeling, it will open up a wide variety of career choices for you – – Investment Banking, Equity Research, Fixed Income Research, Risk Management, Credit Rating, Portfolio Analysis etc.

The reason financial modeling is so versatile is because it helps any job role that deals with analyzing a company. Since very few people actually know how to build a financial model, you will immediately have an advantage. No matter if you have to value a company, analyze a merger/acquisition, take a company IPO, issue shares, secondary sales, advise a company on options pricing – the foundation of all this is a detailed understanding of financial modelling.

5. Become a MS Excel Rockstar

While learning financial modeling you will learn how to use MS Excel to perform the various analysis. MS Excel is the most common tool used by businesses today.

Knowing MS Excel is an absolute must as an aspiring finance analyst.

What do you think? Are there other benefits of learning financial modeling?

This article originally appeared on Dezyre.com


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