6 lessons every Financial Modeler must know:
As a Financial Modeler, can you remember the previous time when you try to increase your financial modeling knowledge? We can bet that you must forget when was that last time? If you ask us, we can define financial modeling as one of those industries where one has to think very toughly and engage themselves in thinking process efficiently. There are lots of characteristics in financial modeling that demand extremely tough thinking due to its helpfulness and immensity.
There are several instances where it has assisted us in performing some unbelievable task that is called incredible by the professionals (financial modeler). For us, the financial modeling is a hard work out of the asset pricing or corporate financing having quantitated nature. In simple language, it is an approach for translating a sequence of hypothesis regarding market behavior as per the numerical predictions. For instance, the decision of an organization related to the investments or its returns.
There are lots of aspects covered by the financial modeling from different angles. As per the professional’s suggestions, the people working in this field should be aware of these notions, tricks, approach, and methods.
In this post, we will talk about the six assured techniques and approach that a professional need to follow for getting success.
Chapter One- Revenue Drivers
All the professional in the finance industry should be aware of the technique for identifying the revenue drivers in a financial model. The corporate or multinational companies used this on a frequent basis. However, there is a major issue that arises in the valuation of almost all the financial models. It is a headache to find a method for estimating the organization’s revenue drivers for which modeling is performed. This is one of the most common issues that is raised by the business owners, analysts, and industrialists.
Chapter Two- Tax Modeling
The majority of people think that tax modeling is a very different thing. However, the reality is much different and it is pretty simple to understand. No matter, you are an individual, an entrepreneur or operating an MNC, we all have to pay government taxes. There is an important role played by the intricacies of the tax modeling and demand understanding about particular things. Some important characteristics of tax modeling are MAT, PBT, and tax rate. It is important that every Indian citizen should be aware of them. However, you should keep one thing in mind that they can be different from one geographical area to another. You should read the complete article if you want to understand each methodology included in the tax modeling and tax calculation.
Chapter Three- Utilization of Excel
Microsoft Excel is a brilliant tool that is utilized by millions of people across the globe. However, the majority of people aren’t completely aware of the features that this tool has. For example, the information about XNPV and NPV functions. Were you aware of any of them or either a function named Roundup in Excel? We have never seen any query about these functions on our site. If you want to learn more about the power of Excel, then read our other posts about it.
Chapter Four- Concept of Terminal Value
There were times when our team members when they avoid practicing and knowing some particular concepts about the cash flows. However, nowadays we feel what the importance of concepts like Terminal Value is. Each concept in the finance industry holds its own importance. You should get knowledge about them before it becomes too late.
There is a certain level of risk involved in all types of business ventures. Every person invests their hard work and money with an ultimate goal that they will pay off somewhere in the future. However, everyone confuses the amount of money to invest until the time arises where we actually invest. Also, we often think about what if there will be no profit? What will we do at that point? However, it is important to keep one thing in mind that it solely depends on calculating a horizon. It is created on the basis of astute & precise calculations that will assist in letting you know when the right amount for cash flows in any company is so that the process becomes mature, steady, and stable.
Chapter Five- Discounted Cash Flows
Do you know what FCFF, DCF, and FCFE are? It has a direct relationship to the organization’s valuation. There is a need to discount the FCFF (Free Cash Flow to the Firm) if your goal is to value an organization. However, you only need to discount the FCFE (Free Cash Flow to the Equity holders) if you want are looking to value the company’s equity portion. Are you aware of these terms and ideas? The people who are employed in an MNC or involved in some kind of business are completely known about them. If you want to become one of them, then it is important that you should read about the PAT, EBITDA, DCF, etc.
Chapter Six- Relative Valuation vs. DCF
The individual who understands the concept of Discounted Cash Flows (DCF) are aware of the fact that it is a long method that needs to be elaborated. However, the ones who don’t aware about this should be aware that there is another kind of methodology, named Relative Valuation through which company can be valued. It can be greatly beneficial for calculating the company’s value in a relation to the values of listed organizations, which are already traded on the public exchange. There are greater chances that the colleagues, senior management officials, and clients may ask you for the valuation of the organization. What do you know about them? You implement the Relative Valuation methodology and receive all the answers. However, it is important to keep in mind that they can vary from one industry to another. That’s why it is important that you should implement this methodology and calculate them according to that. It will not be difficult that way.
As a Financial Modeler, Are you ready for them on the list?
Feel free to start a discussion now if you have any questions and you are already or planning to become a Financial Modeler!