What is the Best Way to Learn Financial Modeling


Andrei Kolodovski, Managing Partner, TRIZ Fund

It's important to understand that this is not about Excel, this is about financial modeling. Knowledge of Excel itself is just a basic prerequisite. 


To build PE models, you will need to develop the following skills:

  1. Excel
  2. Finance
  3. Modeling
  4. Private Equity


Excel
This skill is fairly easy to master to a sufficient level. You will need to learn:

  • Excel interface and tools;
  • Frequently used Excel formulas;
  • Techniques to complete typical tasks;
  • How to import and handle data in Excel.

There are plenty of good tutorials on the web; if you prefer books, everything from John Walkenbach is solid, i.e 

Excel 2010 Bible: John Walkenbach

Finance
You will need to know:

  • Corporate accounting & finance;
  • Financial analysis (understanding financial statements, making adjustments, calculating ratios);
  • Valuation techniques;

This book is a quality source for all of the above: 
Business Analysis and Valuation Using Financial Statements: Krishna Palepu
For valuation analysis specifically, use these:
What is the best book to learn about valuation?

Modeling
Modeling is a distinct skill, don't confuse it with "Excel", which is just an environment for modeling. The most important talent a modeler needs is the ability to simplify complex things without losing their essence. In addition, to be a good modeler, you need to know how to:

  • Acquire and manage data for your models (from databases and data feeds such as CapitalIQ or Factset);
  • Structure your models so that they are transparent and can be easily maintained (learn to separate inputs, logic and outputs);
  • Model typical financial concepts (discount rates, risks, free cash flows, etc);

A good book to start:
Building Financial Models: John Tjia

Private Equity
This knowledge depends on the strategy of your fund, and your target industry. A good approach is to ask your teammates for model samples (ideally, from the past deals), and study them until you understand every cell.


 

Weibo Chen

First thing I would do is familiarize myself with Discounted Cash Flow (DCF) analysis (search up both the Weighted Average Cost of Capital method and the Adjusted Present Value method) and Leveraged Buyouts (LBO). Banks/private equity firms will be doing this kind of stuff all the time. I didn't mention comparables company analysis since it isn't really financial modeling but it is very common also.

Investopedia has a good intro to how a DCF works: http://www.investopedia.com/univ...
 

There are paid online courses that will teach you modeling such as http://breakingintowallstreet.co...http://www.wallstreetprep.com andhttp://trainingthestreet.com/. I believe some banks will actually put their analysts through the Training The Street program.

Investment Banking: Valuation, Leveraged Buyouts and Mergers and Acquisitions by Rosenbaum and Pearl is a good book to read. Its more practical than academic.

There are some good free resources also:

http://macabacus.com/ provides a good overview of different types of models with MS Excel templates you can download.

NYU Stern Prof. Aswath Damodaran has a good site where he shares financial model templates and a lot of other things. http://pages.stern.nyu.edu/~adam...

This will be a little harder to follow than macabacus since it doesn't actually walk you through the process of creating the model. But you can look at them to get a sense of how to structure a model and what sort of inputs are needed. His models are perhaps a bit too "academic" and detailed for practical use.

Lastly, if you look hard enough there are pdf files floating around the internet of internal valuation and DCF handbooks used by the large investment banks. These might be hard to find, they're often on Chinese file sharing sites.

Here's an example of one:

1998 JPMorgan M&A Reference Manual


Peter Lynch, VP Private Equity, Formerly at JPMorgan & Rabobank, Founder of ASimpleModel.com

I developed ASimpleModel for those new to financial modeling. The site introduces the three primary financial statements in the context of Excel / modeling. From there it will walk you through an integrated model, DCF and LBO. All material is video driven with notes and templates available for download. I included the link along with a few additional free resources below:

Free Resources:
Learn Financial Modeling | ASimpleModel (Novice / Intermediate)
Macabacus.com (Intermediate / Advanced)
NYU Stern Prof. Aswath Damodaran 
Investopedia - Educating the world about finance (Vocabulary)

I would also suggest Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions In addition to covering the various aspects of valuation and modeling, the text also covers the process of moving through a transaction and describes the documents required. If you want to work in IB, this is a great resource.

Simon Benninga's Financial Modeling: In addition to financial modeling, the text also covers portfolio and statistical analysis, as well as options pricing models.

I developed ASimpleModel for those new to financial modeling. The site introduces the three primary financial statements in the context of Excel / modeling. From there it will walk you through an integrated model, DCF and LBO. All material is video driven with notes and templates available for download. I included the link along with a few additional free resources below:

Free Resources:
Learn Financial Modeling | ASimpleModel (Novice / Intermediate)
Macabacus.com (Intermediate / Advanced)
NYU Stern Prof. Aswath Damodaran 
Investopedia - Educating the world about finance (Vocabulary)

I would also suggest Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions In addition to covering the various aspects of valuation and modeling, the text also covers the process of moving through a transaction and describes the documents required. If you want to work in IB, this is a great resource.

Simon Benninga's Financial Modeling: In addition to financial modeling, the text also covers portfolio and statistical analysis, as well as options pricing models.

And finally, Prof Damodaran's blogMusings on Markets

I have a few additional answers on this topic as well:

Peter Lynch's answer to How can I get good at financial modeling in three months solo?

Peter Lynch's answer to What is the easiest way to learn how to analyze financial statements?


Jason T Widjaja, back to programming after a 10 year haitus

I think the short answer is 'separately'. 

It is easy to under-estimate how big the difference is between quantitative work andstatistical work. I have unfortunately been on the short end of this and have experienced this first hand - although I was a masters level tutor in finance, I actually failed a fairly substantial statistics quiz when I was doing my masters in business analytics a few years later.

Financial modelling looks like this:


Whereas business analytics - if you take a statistical modelling approach - looks more like this:


These are generalizations of course, but the requirement to code is a lot higher in the statistical modeling side of business analytics compared with financial modeling. I have not seen any financial modelling done in anywhere other than in Excel, up to projects ranging in the tens of millions.

So to circle back to your question, I think your question alludes to five areas:

  • Financial concepts
  • Excel
  • Statistical modelling concepts
  • Statistical modeling tools
  • Business intelligence tools

For financial modeling, I would say 95% of what you want to learn is in 1 and 2. Excel may stretch to macros and VBA, but not much more.

For business analytics, you will want to do 1 to 5, but with an emphasis on 2-5. Because almost any data can be approached up to a point as a data set of a certain class. For example, regardless of whether you are looking at projecting sales revenue for a valuation, or forecasting electricity usage for demand planning, time series analysis techniques will similar. 


Anish Patel, Creator of ValuationUniversity.com, Investment Banking Analyst

Hey! You need to have a working knowledge of basic accounting and finance. Specifically understanding Financial Statements. 

Once you have developed this basis, move onto Valuation University it walks you through the 3 main valuation models and their concepts....

  • The Discounted Cash Flow Model
  • The Comparable Company Analysis
  • The Precedent Transactions Analysis

...as well as provides dynamic excel templates that you can edit right on the site (or download). By far the best free and easy-to-use learning tool out there for financial modeling.

Once you understand the concepts and basics of modeling, move on to Macabacus. Here you can learn more advanced versions of the above models and then move onto others such as the LBO.

As long as there are Investment Bankers their will be financial modeling. As long as companies need larges amounts of financing or advisory services on M&A deals, there will be Investment Bankers.....Private Equity and Venture Capitalists do modeling as well but they will be a little different.


Vivek Srivastava, Occam's Razor !

As Andrei Kolodovski has pointed out, modeling is not just about Excel. Financial modeling might start from excel but surely does not end on excel. It should be seen in terms of the complexity of the requirementdata size and also on the end user perspective. Dozens of tools and platforms can be used for modeling different kinds of problems. For example, valuing a company using DCF analysis might be an easy one using Excel but if you have to use finite difference schemes for option pricing, you might want to use MATLAB.

If it's more of statistical data which needs to be used in your model, you can go for R which is open source. Here is a page where I have collected several resources for learning financial modeling on different platforms such as Python, MATLAB,C++, Excel - How to Learn Financial Modelling and Risk management? 

One thing that should be kept in mind while building models is that the end users are not interested in your tedious formulas and algorithmic approaches, what they want is the result in a fast manner.

Recommended reading:

  1. What is a good model: What is a good model .
  2. What are the real world disasters made while using Microsoft Excel? 
  3. The Modelers' Hippocratic Oath By Emanuel Derman and Paul Wimott - The Financial Modelers' Manifesto

Paramdeep Singh, Ex IBanker and Finance Trainer @ www.edupristine.com/ca

Creating Financial Models from scratch is the only way to learn it! 
You should think of a business situation, lets say projecting your P&L for FY 14. Analyze this completely.

Now think of (and jot down)

  • Revenue drivers (Price and Vol)
  • Variable Costs (Raw Material, services dependent on vol, etc.)
  • Fixed Costs (Manpower, Rentals, etc.)
  • Customer Acquisition Costs (SG&A)
  • Depreciation (This would also impact your Balance sheet through Assets)
  • Interest (This would also impact your Balance sheet through loans)

Create a systematic template and input these assumptions

Now just work on the basic arithmetic and get the P&L


We give a host of excel templates that you can use to learn financial modeling and you can get them from: Financial Modeling of Zynga


To learn Business Analytics, the process remains the same. IMHO, the only difference would be the application of statistics apart from the knowledge of Financial Modeling.


Adam Hoeksema, Co-Founder of ProjectionHub which is a web app that helps entrepreneurs creat...

ProjectionHub - http://www.projectionhub.com is a web application that walks you through the process of creating financial projections.  There is not a specific class, but we do have several videos that explain how to handle different aspects of financial modeling including:

  • Cost of Goods Sold
  • Startup Costs
  • Sales Projections

Brady Chiu, lifelong learner

Originally Answered: What is a good online source to learn financial modeling?

Breaking Into Wall Street. http://breakingintowallstreet.co...

This taught me financial modeling much better than my classes did. (My classes are great, they're just much more theoretical). I like this source because it's very hands on - you get to go through a spreadsheet simultaneously with the videos and learn to build models from scratch.

An added bonus is that it'll teach you all the most valuable excel shortcuts, which are used thoroughly throughout the course. I've been able to use excel without a mouse because of BIWS.


Dheeraj Vaidya

I know it may be like marketing my blog, but for serious guys do have a look at this free 6000+ words free financial modeling tutorial using Colgate Case Study. In this tutorial I have taken financial modeling from scratch, right from downloading the 10K reports to preparing an integrated financial model


Free Financial Modeling Training Course | WallStreetMojo


Ron Zember, #Googler. #ExWallStreeter. #Sneakerhead. Tri-coastal (East, West, Tel Aviv)

I've worked in equity research for the better part of a decade, hold an MBA, and am a CFA charter holder. 

I've taken a number of financial modeling courses, both in formal training programs for the various banks I've worked/interned for, as well as during business school. 

In my opinion, the best "crash course" for financial modeling is offered by a company called "training the street" http://trainingthestreet.com/

I'd start out with their general Excel classes to learn techniques / shortcuts. Then attend their financial modeling classes. 

Best of luck!


Binny Mathews, Co-founder at DeZyre.com - Online courses in job-skills

Typically to learn financial modeling, you will need a course that covers at least the following topics


1. Building historicals and projecting income statement, balance sheet, cash flow statements
2. Linking up all these 3 statements using MS Excel so they work seamlessly. 
3. Discounting cash flows and an understanding of discount rates, beta, CAPM, WACC
4. Triangulating to an equity value using a variety of methods such as DCF, Comparable Trading, Comparable Acquisitions etc.

There are various courses out there and which one you pick depends on how much prior knowledge you already have in financial. If you want to start from the absolute basics and be taken step by step and learn from a Wall Street Investment Banker, you could check out this course - Learn Financial Modelling | Become a Financial Modelling Analyst | DeZyre Online Course