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Many of the answers here focus on where
and how to develop the basic spreadsheet-
ing skills to get good at financial modeling.
Some, like Peter Lynch’s, are actually pretty
great quick resources for that purpose. It
seems that there’s a lot of focus on things like
valuation methods, which, while useful, aren’t
the most critical elements of a good financial
model in my opinion.
So I would start conceptually. Building good
models is ultimately about developing an ac-
curate picture of a company or merger of 2+
companies, from only one aspect--finance-
-that is in sync with how the business runs
in real life; it’s not about coming up with a
single px target or sensitivity table. This is,
I would imagine, just as true for someone
who is interested in equity research as it is for
someone in investment banking or private
equity.
If you start building a model without thinking
about the tactical and strategic finance ques-
tions that a business faces, then down the
road you could end up with something that’s
not flexible enough or otherwise not ideally
suited for your purposes. Remember those
goofy questions that you had to memorize
for investment banking interviews?
Things like this:
• What risks are reflected in my cost of capital?
• Are there companies financed 100%with debt
and 0% equity? Why or why not? And what’s
the optimal capital structure for my com-
pany?
• How would my balance sheet look today, and
evolve differently in the future, if I’m an in-
dustrial company versus an energy company
versus a biotech company?
• I forgot $1 million of depreciation last year
and I recognize it this year. How does it affect
each of my financial statements?
• Why do P/E or EV/EBITDA multiples in my in-
dustry differ so vastly from other industries?
In my opinion at least, these are the sorts of
questions that you should be able to answer
or at least think about in a solid way before
you start getting into the weeds of an Excel
spreadsheet. The process of actually modeling
is fraught with mistakes that you’re bound to
make your first time through; forgetting to lock
a cell reference, reversed signs on a cash flow
statement, silly things like hard-coding a num-
ber rather than referring to an input cell, reffing
out your model (circuit breakers!!!)...
You can develop good habits and avoid these
mistakes using the resource that Peter men-
tioned, plus what other people have discussed
here: What are the best practices when model-
ing in Excel? The initial challenge, though, is
in setting up your model in such a way that it
accurately and comprehensively describes the
business you are analyzing. I am not a debt guy
so I have never reviewed models by fixed-in-
come analysts, but I have spent many hours of
my life tabbing through equity analysts’mod-
els, some of them built by rockstar analysts [or
rather, the rockstars’ overworked research as-
sociates]. I can tell you that some are awesome,
but plenty are, well, rather less so...and either
way, understanding the business has a lot to
do with it.
- Kyle Murao
-
How can I learn
financial modeling? -
