Financial Modeling is one of the most useful and valuable skills in finance. Globally, there are many careers that require strong financial modeling knowledge and technical skills. This is because forecasting the financial position of a company or an asset is essential to decision-making in a wide variety of scenarios: Assessing a company for investment purposes, advising a company on capital raising, understanding a company’s performance and identifying areas where a company’s operations can be enhanced. Financial modeling is also used to assess projects at various stages, which can include greenfield projects, expansions and new project launches. Any important business decision will require an understanding of the financial implications through a strong financial model.
Below are a few of the sectors that rely on strong Financial Modeling knowledge and technical skills:
Accounting is closely related to finance and there is significant overlap in skillsets. Strong technical knowledge is required around financial statements and how different line items interact with each other, as well as financial ratios and key financial metrics.
Corporate / commercial banking and private debt roles focus on providing loans to projects and companies. In addition to analyzing the qualitative aspects of a company’s performance, analysts and associates need to create a forecast for the company in order to understand what its future cash flows may look like. It is imperative that finance professionals in this space have a strong understanding of financial modeling.
Corporate development teams help companies acquire other companies for strategic reasons, such as to expand market share, achieve growth in a new market or product, or to obtain cost synergies through vertical supply chain integration. Although strategic aspects are a considerable factor, it is equally as important to understand the financial implications of the acquisition.
These groups are responsible for analyzing a specific sector in the stock market, and will typically cover 8-20 stocks within any given sector. They write equity research reports which provide an opinion to public investors as to what the fair price of a stock should be, and these reports are typically backed by projection models and sometimes DCF analysis.
Financial planning and analysis (FP&A) roles involve planning, forecasting, budgeting and analyzing a company’s financials. Three-statement financial modeling skills are important and necessary for FP&A professionals to perform their analysis effectively.
Hedge funds manage pools of money on behalf of investors and buy or sell short marketable securities such as stocks. To understand the quantitative side of a company’s performance, analysts will typically build forecast models including a DCF.
In Investment Banking, professionals advise companies on capital-raising, such as initial public offerings (IPOs), and mergers & acquisitions (M&A). During this advisory process, financial models are built to help value the companies, to assess credit quality and to understand the impact of M&A.
In private equity, an LBO model is used to assess the equity investor returns of a potential deal (often done by analyzing the internal rate of return or IRR). An LBO model analyzes the free cash flow generated by a company to determine how much debt can be paid off during the lifetime of the deal.
Venture capital funds invest in start-up or earlier stage companies that require financing to grow. In order to understand what the future revenue, expenses, and cash flow might look like and estimate valuation, Venture Capital investors create projection and DCF models.
