Financial Forecasting, Analysis and Modelling: A Framework for Long-Term Forecasting

CHAPTER 1

Introduction

Chapter 1 answers some simple questions about financial modelling, such as: What is it? Who does it? What are the steps in building a financial model? But above all, why is financial modelling the single most important skill-set for the aspiring finance professional?

The framework for the development of a spreadsheet-based financial model is illustrated by using a simple concrete example. A spreadsheet is used in order to calculate the funding needs of a 2/10 net 30 credit policy on a certain turnover. The inputs and the output of the model are defined. Building this model is relatively straightforward. The model-builder needs to input estimates for certain items (i.e. turnover) and then make sure that the mathematical formulae are correct. From this simple base, the steps of the financial modelling process are described in order to build sophisticated and interconnected models for the income statement, balance sheet, and cash-flow statement, as well as “good/bad/base” scenarios that can be changed with a simple click or two. This ability of spreadsheets to deal with a lot of numbers, work with them, and produce answers is stressed, as well as the use of Excel as the ideal tool for financial modelling.

1.1 WHAT IS FINANCIAL MODELLING?

If you Google the term “financial model” you will get approximately 350 million hits. Yes, that's right. Financial modelling has become the single most important skill-set for the aspiring finance professional. But what exactly ...