A Primer to Creating a Financial Model - ibanking training

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2. Building a financial model is indeed a bit difficult task to accomplish with flying colours. Every game has its rules, so does financial modelling. All you have to learn is its rules and you will definitely earn the brownie points. In this article, we are discussing a streamlined method to creating a financial model. If diligently followed, the method would help you avoid the common errors and achieve the desired result in a single attempt. • It is basically a 5-step method, which includes stages like: • Comprehend business requirements • Call out assumptions • Apply business logics • Validate scenarios • Document

3. Each stage involved is discussed at length below:- • Step 1: Comprehend business requirements • When you head out for creating a financial model, the first thing you are required to do is understand the business requirements at the outset. If you miss out on this state, your financial model would lead you and your organization to nowhere. • In order to ascertain the business requirements, you need to find out answers to following questions: • What does your business expect from this model? • What are the levers in control of business owners? What is beyond their control? • What are constraints (resources/budgets/capacity)? • How well are various departments connected? Once you have a sound understanding of what your business needs, and agree on the set of inputs, put all the data acquired on a excel sheet separately.

4. Step 2: Call out assumptions At second stage, you need to define granularity of a financial model. This is usually determined by level — country level, product line level or product level — your business wants to play on. Step 3: Apply business logic Once you are done with granularity, now it is time to apply logic to the model. This means you need to translate your business understanding into numbers. Learn financial modelling valuation methods through the well-researched online tutorials from iBanking Training. Step 4: Validate scenarios Once the framework of the model is ready, you need to validate different scenarios. Here you have to test different boundary conditions when business logic would no longer hold true. It would be better if you define the minimum and maximum values for various inputs.

5. Step 5: Document • At last, you need to put all the needs, calculations, granularity and limitations in a document. The main purpose of the documentation is to ensure that anyone –from the business or outside it- would understand the model without any difficulty. • In a document, you are needed to include the following points: • Background • Business need • Scope of the model • Problem statement • Areas out of scope of modelling • Limitations • References (if any) • Business logic and calculations

6. This is a five-step method to creating a business financial model. You can learn financial modelling skills from online tutorials by iBanking Training to understand the stages involved in an efficient manner.

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