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An Overview of Financial Modeling, Including Examples, Templates, Careers, Salaries and Training Courses

What is financial modeling, and why does it matter.

We get many questions about what “financial modeling” means, how important it is in the finance industry, and why so many students and professionals are obsessed with learning it.

So, let’s start with the basic definition:

Financial Modeling Definition: A financial model is a spreadsheet-based abstraction of a real company that helps you estimate the company’s future cash flows, financing requirements, valuation, and whether or not you should invest in the company; models are also used to assess the viability of acquisitions and the development of new assets.

Suppose that your crazy rich uncle calls you and tells you about his latest investment: a tequila company into which he just “poured” $100,000.

He shares data about the company’s sales, employee count, and market share, and then he claims that his $100,000 investment will be worth $1 million in 5 years.

He then gently encourages you to put your life savings into this tequila company.

A robust financial model lets you input these parameters, project the company’s future cash flows, and assess the likelihood of your uncle’s $100,000 investment turning into $1 million in 5 years.

Financial models cannot predict any outcome with a high degree of certainty.

The goal is to be “roughly correct” rather than “precisely wrong.”

If a financial model tells you that a company is undervalued by 5% or 10%, that is a meaningless result because the margin of error is so high.

But if the model tells you that the company is undervalued by 90% or overvalued by 200% , those are much more useful results.

Even if you’re wrong about the percentages, you can still make money if you are directionally correct .

Returning to this tequila company example, perhaps your model produces the following results for your uncle’s $100,000 investment:

• $1 million in 5 Years: This would require the tequila company to grow from 1% to 10% market share in a very crowded market within 5 years. Alternatively, the company could also get there by selling its tequila at 3x the normal price and capturing 3% of the market.
• $500,000 in 5 Years: This would require the company to win 5% market share within 5 years or sell its tequila at 2x the normal price while capturing 2% of the market.
• $200,000 in 5 Years: This would require 3% market share within 5 years or tequila sold for 2x the normal price and 1% of the market (the same as the current share).

What’s the conclusion?

It’s unlikely that your uncle’s $100,000 investment will turn into $1 million within 5 years because the required pricing and market share are unrealistic.

We can’t assign a specific probability to this outcome, but we can say that no food & beverage company in history has ever achieved this performance in this time frame.

• If the company does achieve this performance, it will likely take more than 5 years.
• And the other outcomes here, especially the last one, are more plausible.

Doubling or quintupling your money over 5 years is still a great result, so you might take your uncle’s advice and invest some amount.

Or, perhaps you do further research into the company and its market, become more skeptical, and decide against investing.

A financial model is just a PART OF the investment process; it’s like a piece of evidence in a courtroom murder trial.

It can help persuade others that you are correct, but a spreadsheet by itself doesn’t solve the case or convince everyone on the jury.

Types of Financial Models

There are 4 main categories of financial models used at normal companies, investment banks that advise companies on transactions, and investment firms:

• Category #1: 3-Statement Models (Income Statement, Balance Sheet, and Cash Flow Statement) or “Budgets” at normal companies (see here for more on 3-Statement Models)
• Category #2: Valuations and DCF Models (Discounted Cash Flow Models)
• Category #3: Merger Models (also known as M&A Models or Accretion/Dilution Models)
• Category #4: Leveraged Buyout Models (slight variations include the Growth Equity Models and “Investment Models”)

3-Statement Models

In these financial models, you project a company’s revenue, expenses, and cash flow-related line items, such as the Change in Working Capital and Capital Expenditures.

You then use these numbers to forecast the company’s financial statements , i.e., its Income Statement, Balance Sheet, and Cash Flow Statement, over several years.

The Income Statement shows a company’s revenue, expenses, and taxes over a period of time and ends with its Net Income (i.e., its after-tax profits).

The Balance Sheet shows a company’s Assets , or its resources that will deliver future benefits, and its Liabilities & Equity , or its funding sources that have direct or indirect “costs.”

The Cash Flow Statement provides a reconciliation between a company’s Net Income and the cash it generates, which is often quite different.

For example, accounting rules state that cash outflows for spending on long-term items such as factories and properties should not appear directly on the Income Statement because these items could be useful for many years.

So, companies record the cash outflows for this spending as “Capital Expenditures” on the Cash Flow Statement.

If a company buys a new factory for $100 million, its cash flow is reduced by $100 million – but you wouldn’t know it by looking at the Income Statement.

The company’s Income Statement only shows the “Depreciation” representing the allocation of this $100 million over many years.

For example, if the factory is expected to be useful for 20 years, the company might record $100 million / 20 = $5 million of Depreciation per year on its Income Statement.

The Cash Flow Statement records all the cash inflows and outflows, which gives you a full picture of the company’s business health.

It prevents companies from hiding behind non-cash revenue and expenses that might distort their Income Statement.

These 3-statement models are widely used at normal companies for budgeting purposes and at banks and investment firms to assess companies’ financing requirements.

For example, a 3-statement model might tell you that a company will need additional capital in 3-4 years to continue its aggressive expansion strategy:

If a company has already borrowed money, a 3-statement model might tell you how well it can repay that Debt over the next 5 years.

3-Statement Model Examples

Here are a few examples of 3-statement models:

• Illinois Tool Works – Sample 3-Statement Modeling Test and Tutorial
• Industrials Investment Banking – Screenshots from an airline 3-statement model
• Healthcare Investment Banking – Screenshots from a bio/pharma 3-statement model

Valuations and DCF Models

In valuation models, you estimate the range of values an entire company might be worth today .

For example, if a public company’s market capitalization (market cap) is $10 billion, is it overvalued, undervalued, or appropriately valued?

Should it be worth closer to $5 billion, or something closer to $15 billion?

Valuations are designed to answer these questions.

You can value a company using different methodologies, but two of the most important ones are the Discounted Cash Flow (DCF) analysis and trading multiples , also called “comparable companies,” “public comps,” or “ comparable company analysis .”

In a DCF, you project a company’s cash flows far into the future (5, 10, or even 20+ years) and discount them to their “Present Value” – what they’re worth today, assuming that you could invest your money elsewhere at a certain rate of return.

With trading multiples, you calculate other companies’ values relative to their financial metrics, such as revenue or profits, and you apply those “multiples” to value your company.

For example, if similar companies are worth 3x their annual revenue, and your company has revenue of $200 million, perhaps it should be worth about $600 million.

In a DCF model, similar to the 3-statement models above, you start by projecting the company’s revenue, expenses, and cash flow line items.

Unlike 3-statement models, however, you do not need the full Income Statement, Balance Sheet, or Cash Flow Statement.

Many of the items on these statements are non-recurring or have nothing to do with the company’s core business, so a partial Income Statement and Cash Flow Statement are sufficient:

This approach saves time and results in nearly the same output in most cases.

Valuation and DCF Model Examples

You can get examples of valuation and DCF models below:

• Comparable Company Analysis
• Uber Valuation
• Snap Valuation
• DCF Model – Walmart Valuation

The Walmart example also explains the “big idea” behind valuation and DCF analysis.

Merger Models (AKA M&A Models or Accretion/Dilution Models)

A merger model is different because it involves two companies rather than one.

The goal is to assess whether a larger company’s acquisition of a smaller company provides a financial benefit .

For example, will the acquirer’s Earnings per Share (EPS), defined as Net Income / Shares Outstanding, increase after the acquisition closes?

Will the acquirer’s valuation increase after it acquires the target company and properly integrates it?

Is the acquirer paying a fair price for the target based on the financial metrics of both companies?

If the acquirer is issuing new stock (shares) to acquire the target, will each company own appropriate percentages after the deal closes?

Merger models are designed to answer these types of questions.

Similar to valuations and DCF models, you do not need a company’s full Income Statement, Balance Sheet, and Cash Flow Statement to build a merger model.

You just need the Income Statement and a partial Cash Flow Statement for the acquirer and the target:

More complex merger models often include the full financial statements, but they’re not required for a basic analysis.

Other key assumptions include the price paid for the target, the form of consideration (Cash, Debt, or New Shares Issued), and the expected synergies (ways for the combined company to cut costs or increase sales).

As with all other financial models, a merger model is just one piece of evidence in the process of negotiating a deal.

A company’s Board of Directors would never approve of an acquisition solely because of a merger model’s output.

There must be other perceived benefits, such as strategic, market, and competitive advantages from the deal.

For example, maybe the target company gives the acquirer access to a high-growth market that would have taken years to enter independently.

Or maybe the target company has valuable intellectual property (IP) that the acquirer cannot easily develop on its own.

M&A and Merger Model Examples

You can view a few sample M&A and merger model tutorials below:

• Merger Model Walkthrough: Combining the Income Statements
• Merger Model: Cash, Debt, and Stock Mix
• Merger Model Interview Questions: What to Expect

Leveraged Buyout Models (AKA Growth Equity Models or “Invest Models”)

This last category is a variation on the first category (3-statement models).

We’re listing it separately because most people consider them separate, despite the similarities.

In leveraged buyout models (LBO models), the goal is to calculate the multiple or annualized rate of return you could earn by investing in a company, holding your stake, and eventually selling it.

For example, if a private equity firm acquires a company for $1 billion, operates it for 5 years, and sells it, could it potentially earn an average annualized return of 20%?

Or would that require implausible assumptions, such as the company going from a 10% profit margin to a 30% margin within 5 years?

The full financial statements are not required for these models because the investment returns are linked primarily to the company’s cash flow and cash flow growth rate.

And the “exit value” when the company is sold is usually linked to metrics that act as proxies for cash flow, such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) .

As with the other models above, you start building an LBO model by projecting the company’s revenue, expenses, and cash flow line items.

These give you a sense of the company’s Free Cash Flow , or the cash it generates from its core business operations after paying for funding costs, such as interest on Debt:

Based on the purchase price, the exit value, and the cash flows generated in the holding period, you can calculate the multiple of invested capital (MOIC) and the internal rate of return (IRR) , also known as the average annualized return.

This model is known as an LBO model or leveraged buyout model because private equity firms use a combination of Debt and Equity to fund acquisitions of entire companies.

It’s similar to buying a home using a down payment and a mortgage, but on a much larger scale.

The private equity firm operates the company, uses the company’s cash flows to repay the Debt, and sells the company after several years.

The need to track this Debt repayment and the associated line items makes the Excel formulas more complex than those used in a standard 3-statement model.

If the private equity firm does not use Debt, the model is much simpler because you need only the cash flow projections, the purchase price, and the exit value.

This variation is often called a “growth equity model” or simply an “investment model.”

Regardless of the model variation, though, the goal is always the same: determine plausible ranges for the multiple of invested capital and the annualized returns.

You can get example LBO models, growth equity models, and leveraged buyout tutorials below:

• Growth Equity: Full Tutorial and Sample Case Study
• Simple LBO Model – Case Study and Tutorial
• IRR vs. Cash-on-Cash Multiples in Leveraged Buyouts and Investments

Industry-Specific and Specialized Financial Models

In addition to the categories above, there are also specialized financial models in industries such as commercial real estate , project finance , and infrastructure private equity .

In these industries, financial modeling is based 100% on cash flows rather than accounting profits, so the three financial statements are not used.

Revenue and expense projections also differ significantly.

For example, in real estate financial modeling , revenue and expenses are based on individual tenants and the terms of their leases, including annual rent escalations, the expenses paid by the tenant, and the probability of leases expiring.

In project finance and infrastructure, the projections are often based on individual contracts as well – and there may be hundreds or thousands of them.

Another difference is that in addition to modeling the acquisitions of existing assets, you may also model new developments in both these industries.

To do that, you assume that a new development initially draws on Equity (i.e., cash from outside investors) and then switches to Debt once a funding threshold has been met.

When the asset is under development, it does not generate cash flow, so the interest and fees on this Debt are capitalized.

Once the development is complete, a loan refinancing occurs , the construction lenders are repaid, and new lenders fund the stabilized asset.

Specialized Financial Models for Real Estate and Construction

If you want examples of these specialized models, please see our coverage below:

• Real Estate Financial Modeling
• The Real Estate Pro-Forma
• Infrastructure Private Equity
• Project Finance Jobs

There are model variations in other industries as well.

For example, with oil & gas companies, the Net Asset Value (NAV) model is a variation of the traditional DCF analysis that does not have a Terminal Value – because oil & gas assets have limited economic lives.

Once enough oil or gas is extracted from a field, further extraction is no longer economically viable – even if some resources remain in the ground.

The asset is effectively “dead” until market conditions change.

Therefore, you cannot assume that the asset will keep generating cash flows indefinitely into the future.

With banks and insurance companies, there are DCF variations such as the Dividend Discount Model (DDM) and the Embedded Value (EV) model for life insurance.

These models have some differences, but they still value companies based on their future cash flows or proxies for cash flow, such as dividends.

Which Careers Use Financial Modeling?

The financial models described here are widely used in the following industries:

Investment Banking

Investment Bankers assist companies in raising capital and executing transactions such as mergers and acquisitions (M&A).

Private Equity

Private equity firms raise capital from outside investors then use this capital to buy, operate and improve companies before selling them at a profit.

Venture Capital

Venture capital firms raise capital that is invested in early-stage, high-growth companies with a view to exiting via acquisition or IPO.

Hedge Funds

Hedge fund managers raise capital from institutional investors and accredited investors and invest it in financial assets.

Corporate Banking

Corporate bankers aim to win and retain clients who hire the bank for M&A deals, debt and equity issuances, and other transactions with higher fees.

Corporate Development

Corporate Development focuses on acquisitions, divestitures, joint venture (JV) deals, and partnerships internally at a company.

Equity Research

Equity research relates to the sell-side role at investment banks where you make Buy, Sell, and Hold recommendations on public stocks.

Financial Modeling Salaries

If you look at the articles above, you’ll see compensation estimates for fields such as investment banking, private equity, and hedge funds.

As a senior professional in these industries, you can earn $1 million+ if you count the base salary, bonus, and other incentive-based compensation.

However, you rarely do “financial modeling” at the senior levels in these fields.

Senior-level roles are almost always sales or negotiation jobs , where your role is to generate revenue by bringing in new clients, raising capital, or closing deals.

Most of the financial modeling is done by junior-to-mid-level professionals, such as Analysts, Associates, and Vice Presidents.

The total compensation for these roles might range from $100K USD on the low end up to $500K USD depending on the industry, firm size, and location.

For example, Investment Banking Analysts often earn total compensation in the $150K – $200K USD range in major financial centers in the U.S.

Private Equity Associates might earn $150K up to $300K or even $350K, depending on the firm.

And a Vice President will progress toward mid-six-figure compensation.

Outside of these fields, financial models are used in other industries, such as corporate finance , corporate development , and Big 4 Transaction Services .

The compensation in these fields is lower than the ranges quoted above; for more details, please click through to the links above.

How Much Does Financial Modeling Matter for Investment Banking?

If you poke around online, you’ll see a wide range of opinions on the importance of financial modeling:

• Some people claim you need to know it perfectly, even for entry-level interviews and internships.
• Others say that it’s overhyped and not that important; they point out that many groups are not especially technical and do not do much Excel-based modeling.
• And others say it’s only important for the “ exit opportunities ” following investment banking, such as private equity.

As usual, the truth is somewhere in the middle.

You do not need to know financial modeling “perfectly” for entry-level interviews and internships, but you do need a solid base of technical knowledge to be competitive.

For example, how do the 3 financial statements link together? How do you set up a DCF and use it to value a company? What are the trade-offs of different valuation methodologies?

You could memorize the answers to these questions, and that might work to some extent.

But the best way to mastery this technical knowledge is to learn and practice financial modeling. It’s the difference between passively listening to a foreign language and actively practicing by speaking and writing in that language .

Financial modeling matters less for the direct benefit and more for the indirect benefit of mastering the accounting, valuation, and transaction analysis concepts that you’ll be asked about in interviews.

It is true that certain groups in investment banking, such as equity capital markets , do not do much financial modeling work (they spend more time in PowerPoint and Word creating market updates).

But in interviews, they’re still going to test you on the key technical concepts.

Finally, it’s also true that financial modeling is more important in some fields than it is in others.

For example, modeling skills do not matter much in early-stage venture capital investing because investing in startups is a much more qualitative process.

An early-stage startup does not have cash flows to model, and the founder’s personality and drive matter more than any spreadsheet.

But modeling skills matter more at late-stage VC firms and private equity firms since they invest in mature, established companies.

How to Learn Financial Modeling: Free Tutorials

If you want to learn the fundamentals of the DCF analysis, one of the most important models, you can sign up for our free 3-part tutorial series below:

• 3-Part Financial Modeling Series: The DCF

This series walks you through each step of the analysis, from projecting the company’s Unlevered DCF to estimating its Discount Rate and Terminal Value.

If you want tutorials on other topics, you can also consult our YouTube channel for hundreds of examples:

• YouTube – Financial Modeling

Financial Modeling Courses

If you want  comprehensive, structured training that teaches you financial modeling based on global case studies of real companies and deals, here are our most relevant financial modeling courses and packages:

• Core Financial Modeling – This course gives you a great foundation in accounting, valuation, and M&A and LBO modeling
• Advanced Financial Modeling – This course delves into more complex models and deal types and is  not for beginners; it’s for professionals with some experience who want to improve their skills even more
• BIWS Premium – This package combines our Excel, PowerPoint, and Core Financial Modeling training, all at one discounted price
• BIWS Platinum – And this package gives you  everything we have , for a substantial discount (50%+)

These courses are for candidates who are serious about winning highly competitive internship and full-time offers at banks, private equity firms, and hedge funds.

If you have no interest in working at these firms and you just want quick tips and tricks, these courses are not appropriate for you.

But if you want to gain advanced technical skills, they are perfect.

Of course, there’s more to the job than Excel-based analysis, but mastering the technical side goes a long way toward the rest of the skills.

Learn Valuation and Financial Modeling

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Financial Modeling Case Study: OOVA

Amy Divaraniya, CEO and co-founder of OOVA, created a product she knew the market needed. Yet, while she was pitching investors trying to close her seed round, she found that the financial projections needed a fresh pair of eyes.

By Elizabeth J. Howell Hanano, CFA

Elizabeth was an equity research analyst on both the buyside and sellside before transitioning to freelancing where she specializes in market research and valuation.

PREVIOUSLY AT

The following is a Toptal Case Study that details how one founder worked with a Toptal financial modeling consultant to bring confidence and certainty to her projections.

Problem: a founder trying to close a seed round needs financial projections based on research presented in a way investors understand..

Amy Divaraniya, CEO and co-founder of OOVA, created a product she knew the market needed - a fertility diagnostic kit that brought the accuracy of a clinic into your own home. Yet, while she was pitching investors trying to close her seed round, she found that the financial projections needed a fresh pair of eyes. Divaraniya recalls, “When financial projections came up in conversation, I felt they were weak. They weren’t backed up by data. Further, it was in a format I could understand, but it was something VCs were not used to seeing.”

While Divaraniya had great relationships with other startups, she couldn’t get her hands on a good template. “That’s the one thing nobody wants to share.” Even if she did, Divaraniya felt she didn’t have the background to make fact-based, reasonable assumptions. “What’s the going growth rate I should assume for legal fees? Taxes? What is a typical CAC for a company like ours? How are we different?”

Solution: A financial model with significant flexibility and logic, with every assumption based on research.

How divaraniya found the right consultant.

Divaraniya had been working with a Toptal developer since 2018 and saw that Toptal also offered finance consulting. She decided it was time to pull the trigger so she began interviewing candidates.

The Toptal matching team selected two consultants with appropriate backgrounds, and Divaraniya chose Jeffrey Fidelman during the interview. “With Jeffrey, he understood what I needed. He’d ask, ‘Have you thought about these things?’ Everything he mentioned, someone had asked me about and I didn’t have well-fleshed out.”

He really understood what my need was, not what my ask was.

Quick Kickoff Process

Fidelman plugged himself into the workflow immediately. “The interview was toward the end of the week and over the weekend, he sent a sample of what a financial projection would look like. He responded to everything over the weekend, within a few hours.” They had a kickoff call on Monday and then communicated at least twice per week for the next few weeks. In about two weeks, Divaraniya had a working model.

Understanding the Bigger Picture, Not Just the “Ask”

The project could have ended there, but Fidelman kept asking questions that unveiled more holes that Divaraniya wanted to fill in her fundraising efforts. Further, Divaraniya realized she wanted to add flexibility to her model so she could see the impact of different strategies (e.g., various distribution models). While Divaraniya thought she just wanted a basic financial model , she ended up working with Fidelman for about 100 hours. In the end, she not only had a very flexible financial model, she had six reports of about 25 pages each backing up every assumption.

Snippet from Market Research Report

A Flexible Financial Model

At the time Fidelman was building out the financial model, both Fidelman and Divaraniya were still working out the optimal sales channel model for OOVA. “At the same time, we were still doing product development. The sales model kept changing. Should we have affiliate fees? One-time fees? Jeffrey was super flexible. No matter what I decided, we could still make it work with the model he created.” Fidelman ended up creating an assumptions tab that included the various sales methods Divaraniya was considering so she could simply plug and play when she decided on a model.

Market Research to Create Fact-based Financial Model Inputs

Your model is only as good as its inputs. Fidelman aimed to create a model that resembled the company as closely as possible. While the expense side was relatively straightforward, the topline figures took some research. Fidelman tapped his network to research questions like: What’s the average markup? What’s the size of the US fertility market? “Yes, it’s health technology, but it’s also consumer goods. So a lot of the research I did was relative to things like heart rate monitors, baby monitors, and contraceptives,” noted Fidelman.

Fidelman researched the unique market position of OOVA. “It’s tech-enabled, yes. But they’re still ovulation sticks so you’ll likely need to replenish them. Where would you find this OTC? Would it be in the Personal Care/ Family Planning section? Will it be behind the counter at the pharmacy? We had to really think about who we wanted to sit with.”

Results: A flexible financial model based on deep market research that aided OOVA in closing its seed round.

With a flexible financial model and market research in hand, Divaraniya successfully closed her seed financing round. “Conversations with investors were so much easier. During fundraising, I felt like I could firmly stand on my own two feet.”

About OOVA: OOVA is a fertility diagnostic company that spun out from Mount Sinai Hospital in New York City. Using patent-pending biochemistry and artificial intelligence, OOVA learns a woman’s fertility profile by accurately measuring key hormones over time through daily urine samples. By monitoring this critical balance of hormones, OOVA can help a woman get pregnant, identify reasons she is having trouble getting pregnant, and even expose reproductive health issues like PCOS.

About Jeffrey Fidelman: Jeffrey has been a trusted advisor for several years, focused on working with entrepreneurs and helping them build and grow their business, often from the ground up. He's successfully helped entrepreneurs raise more than $1 billion. His ability to work across a wide variety of industries is the result of a diverse investment background. Freelancing enables him to work directly with leadership to achieve efficient and positive results.

Understanding the basics

Why is financial modeling important.

An accurate, research-based financial model can help companies demonstrate their value to investors, making it easier to attract funding and support future growth. The financial projections provided by the model can also enable smarter, more informed decision-making and make it easier for the company to pivot and respond to challenges when they arise. Without a sound model in place, a company may not fully understand the financial implications of its choices.

How long does it take to build a financial model?

An extremely detailed financial model with assumption drivers for many variables could take 30-60 hours to build. Additional research to provide a basis for assumptions could add additional time as well. A basic financial model that projects annuals (not weeks) and uses high-level drivers without significant logic may take as little as one hour.

What do financial projections include?

At a high level, financial projections include money coming in and money going out. Generally, the most important big picture financial projections include revenue, expenses, cash, debt, and cash flow. At a detailed level, financial projections should take all the major drivers of historical three-statement results and forecast them going forward: income statement, cash flow statement, and balance sheet.

• Forecasting
• Fundraising

Elizabeth J. Howell Hanano, CFA

Annapolis, MD, United States

Member since August 21, 2017

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An ACA qualified financial modeller and Greenwich University lecturer, George’s financial modelling journey started at KPMG.

George has over ten years of accountancy and financial modelling experience, including engineering, treasury, rail, utilities, and education sectors with models built to process £bn scenarios.

George provides Excel-based model builds, and he is also an accomplished VBA programmer.

ACCA and AFM-qualified financial modeller and accountant, Aleksandra’s progressive career began at Ernst & Young.

Aleksandra has seven years of accountancy and financial modelling experience spanning private equity, housing, logistics, travel, retail, and education.

Aleksandra is an adept and proven financial modelling consultant and also delivers financial modelling courses.

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"George’s recent work for us has been outstanding. The feedback from our internal team has been excellent and he has delivered on time and within budget. The modelling and planning work we needed from him was required by ourselves internally and also our business partners which include an Investment Bank, Institutional investors and various legal and accounting advisers. Everyone has been amazed at his responsiveness and accuracy. I look forward to working with George in future."

"We engaged with George to build a brand new integrated financial model to help us achieve a successful refinancing last year.

George very quickly understood the different key variables and indicators for our business and completely met the brief. Undoubtedly, the quality and clarity of the model and the detailed financial outputs played a huge part in our success.

George now works with is to produce monthly charts and outputs as part of our formal reporting requirements. George is supremely professional in his work, highly knowledgeable and very accessible and it's been a joy to work with him on our various projects. I have no hesitation in recommending George and his team."

"When PPS began working with us, it was following on from the failed attempts of several other organisations. As soon as George came on board it was clear he understood our complex business structure and immediately assisted us with required modelling of a major transaction, as well as creating a modelling centre of excellence to help guide our team in the future.

Further to that, he redesigned our modelling suite, simplifying models without losing functionality, pruning unnecessary modules in a structured way so that the models were all fully operational throughout the transformation. His incredible and vast technical knowledge is matched with a very measured, pragmatic, can-do and professional approach which made him a value adding and exceptional partner for me and the Team."

"I was given an introduction to George at PPS by a good friend! I was told he was reliable, experienced and cost effective. We asked George to audit our financial business model and make it better! He demonstrated all the qualities mentioned above, provided a very professional service in a timely manner and the output exceeded expectations. I would be very happy to recommend George / PPS for any future financial modelling work and please feel free to contact me if you want to know more. Well done!"

"George joined us as a visiting lecturer for the 2020-21 academic year to teach our final year students financial appraisal modelling. George is a highly experienced educator and industry professional in this area and was able to successfully adapt his teaching to undergraduate students.

He is very supportive, engaging and is able to explain concepts in different ways to help all the students understand. This was in spite of the forced online nature of our delivery due to Covid restrictions. His materials, assessment and examples are well structured and industry-led and the students and colleagues have enjoyed his classes and we very much look forward to working with George again."

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"We were lucky enough to have George in to work on some business specific modelling projects, and it was very evident he has exceptional modelling skills and the ability to really take Excel to another level.

Even given high levels of complexity that he was able to work with, it was always accompanied by clear and simple articulation of his modelling approach and workings. His attention to detail shone through, and combined with a very evident focus on model planning, structure and audit functionality (all of which I think are all too often overlooked), we achieved a great outcome and I learnt a lot about best practice in just a short time.

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We worked together on an infrastructure bid, George was my “go-to” excel modelling expert. I highly recommend George for any financial modelling challenges."

"George and I worked together as joint advisors for National Grid on a complicated regulatory finance project while at different consulting firms.

George was seconded as a modeller and developed a revised version of the regulator's financial model in order to test the gaps and limitations. I was part of the team that peer reviewed and stress tested his work.

I found George's modelling and finance skills to be first rate and he was a great collaborator taking on board our observations in the spirit of delivering excellence to the client. In the process, I learnt a lot about best practice modelling. More importantly, the common client was thoroughly impressed with George's efforts too."

"I had the pleasure of working with George on the West Coast Partnership bid team back in 2018.

George identified what needed to be achieved and then built the various constituent elements of the excel model to allow us to achieve a fantastic end result that exceeded my expectations and that was suitable for submission to the Department For Transport.

The depth of understanding and ability to translate this into a sophisticated functioning excel model is a rare commodity, George is one of the best in his field."

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I’m no stranger to financial modelling and still found the course eye opening. George is an amazing teacher - patient, crystal clear when explaining complex concepts and very engaging.

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Aurelius Power Solar acquisition

To illustrate the model design and construction skills in the Handbook, we’re going to build a complete financial model together based on a Solar Power case study.

1 Project outline

1.1 background.

Your firm, Aurelius Power, has been invited to co-invest in a solar project. The Project has been developed by a company (the “Sponsors”) that you have invested alongside several times before. Your task is to construct a financial model to evaluate the investment opportunity and arrive at a recommendation for your firm’s Investment Committee.

The Project is scheduled to commence operations on March 31st 2021, (“Commercial Operations Date” or “COD”)

The Project is underpinned by a 25 year Power Purchase Agreement (“PPA”)  with a national government off-taker. The Project is taking place in a country with a high level of political risk and a relatively weak economy.

Technical parameters for the Project are set out in Section 2.

1.2 Investment premium

Sponsors are looking to sell down part of the Project at COD. Having taken the development risk and successfully managed the construction risk, and with the entire 25 years of the PPA left to run, they consider this an optimum time to sell a share in the Project.

Sponsors plan to sell 40% of the business to an investment partner. You are being asked for your offer to purchase 40% of the common stock of the Project Company (ProjectCo). Your offer will take the form of a  premium that you are willing to pay to acquire this share in the Project.

You would be looking to secure an Equity IRR of 12% on the investment.

1.3 Timetable

The table below sets out the crucial assumptions regarding the project schedule and the implications of the Project’s critical dates.

PLANNED COD  - 31 March 2021

• Project begins generation and receives revenue
• Repayment of senior financing begins
• Incoming investor premium to be paid
• Incoming investor entitled to 40% of project returns from this date

LENGTH OF PPA  - 25 years

• Duration of revenue and cost forecast

2 Technical and operating parameters

2.1 electricity generation.

The most recent P50 estimate of power production at maximum availability is 250 GWh per year. This may be subject to change before COD as final technical optimisation occurs.

Sponsor's technical assumptions indicate that the plant will operate at 97% availability on average, and generation will be subject to a 0.5% p.a. performance degradation.

Figures for seasonal variation are as follows:

Q1 – April to Jun – 33% of annual production

Q2 – July to Sep – 36% of annual production

Q3 – Oct to Dec – 15.5% of annual production

Q4 – Dec to Mar – 15.5% of annual production

2.2 Power tariff

Sponsors have signed a 25 year Power Purchase Agreement committing to a tariff of 6.5 US$c / kWh, unindexed. The PPA provides that the Sponsor will invoice the off-taker monthly and that invoices will be paid within 30 days of presentation. Sponsors assume that invoices will be prepared and issued no later than 15 days from month end.

You have not yet seen the PPA document itself and will need further due diligence before finalising your offer.

2.3 Operations and Maintenance (“O&M” contractor)

A 25-year contract has been signed with an O&M contractor to operate the plant. A fixed annual fee of $1.5m per annum has been agreed upon. This amount is index-linked to US CPI. Indexation will be applied annually on the anniversary of COD. Payment terms agreed with the O&M contractor specify that the O&M fee will be paid monthly within 30 days of month-end.

2.4 Taxation

You are awaiting Sponsors to share the tax guidance they have received for the Project. A quick google search indicates that Companies in this jurisdiction pay 15% corporate income tax.

3 Project costs and financing

3.1 project costs.

Sponsors have provided a high-level indication of total project costs. Project costs are defined as all construction capex, plus reimbursed development costs, development fees and financing costs incurred during the construction period. They have indicated that this figure will be $100m by COD. Initial accounting advice indicates that this amount should be depreciated on a straight-line basis over a 25 year period.

3.2 Senior debt

Sponsors entered into an Interest Rate Swap at 2.5% for the duration of the senior debt term. The interest margin on the senior debt during the repayment period will be 3.5% (act / 360). Interest and principal on the senior loan will be paid quarterly. You have not yet seen the credit documentation, but you understand that the leverage will be around 70% and with a repayment period of 10 years.

3.3 Revolving Credit Facility

Fluctuations in period revenue may mean cash shortfalls in several periods. Sponsors have indicated that a revolving short term facility may be available to meet seasonal cash flow shortfalls. This facility will rank below senior debt but above any shareholder distributions in the cash flow waterfall. Your research indicates that an annual interest rate of 12% is reasonable for such a facility.

3.4 Sponsor equity

The remaining 30% of Project Costs not financed with debt will be funded by equity. At the start of the construction period, Sponsor's equity was invested in the form of an Equity Bridge Loan which is due to be repaid by Sponsors at COD. Sponsors will repay the Equity Bridge Loan at COD, effectively replacing the Bridge Loan with their Equity. Note – as the loan will be repaid by the investment of the Sponsor share capital at COD, you do not need to model the equity bridge loan. Financing costs of the Equity Bridge Loan are included in the $100m Project Cost estimate.

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Talent [R]evolution

Grasp key concepts with this financial modelling case study

• Data & Technology

As a financial modeller, you have to explain very technical concepts to audiences with little to no background in finance. This is a unique skill, as it requires both technical expertise and soft skills . You have to ensure the client can grasp complex concepts, without going into an exhausting amount of detail; only then can you sell your solution. One of the best strategies to outline the key concepts and benefits is with this financial modelling case study , which we’ll outline here.

This particular case study is from the steel industry. It demonstrates how the modeller themselves has to spend a lot of time understanding the technical data and then translate this into layman’s terms. Concurrently, the modeller also has to understand the business context in order to make this translation comprehensible, and indeed, actionable. 

In essence, they need to have a robust understanding of the business and how it will be impacted by changes. This is the foundation of an effective business model, action plan, and risk analysis, which were delivered here for this major steel manufacturer. Before we get into this financial modelling case study , we’ll outline some key concepts.

Table of Contents

What is the purpose of financial modelling?

Financial modelling is about decision making. These projections enable personnel to make better decisions, primarily through having a deeper understanding of the business and how both internal and external factors may affect its operation . This includes forecasts for expected cash inflows and outflows and the implications of various funding options. A financial model will aid due diligence by estimating the financial impact of a particular activity, thus helping to manage risk. Financial models can also provide a benchmark for incremental performance reviews.

However, not all decisions are created equal and for each of these forecasts, there is a specific type of financial model. It is important to understand that financial modelling is not an exact science (albeit a very technical discipline) and the results obtained are not set in stone. Instead, financial modelling is a framework or a set of guidelines for decision-making as opposed to a crystal ball. But that’s not to say a good financial modeller can’t make some very accurate predictions. Often, calculating exact dollar and cent outcomes is not the key goal, but instead, exact predictions of the magnitude and direction of movements in the event of a change in assumptions or circumstances.

Why is financial modelling important in decision making?

To illustrate how financial modelling can enhance decision-making, it’s useful to outline the key types of models . With these introductions, you can get a more tangible sense of how financial modelling could benefit a business according to its specific circumstances. Below we’ll outline five principal groups.

• Profitability and price planning: These models are used to analyse how a company can deploy its resources in order to profit. For a retail business, for example, this may comprise identifying the optimal product mix or pricing strategy to maximise profitability. Such models are used for forecasts about the immediate future, as the variables tend to be too volatile to make long-term projections.
• Liquidity planning: Taking on debt is part of growing a business, but with debt, comes risk. Liquidity planning enables companies to keep a handle on their cash flow to track their solvency. This model will also take into account external factors like interest rates and currency fluctuations. The model can simulate extreme economic scenarios to test the company’s solvency. 
• Credit planning: Most businesses operate by offering clients credit. However, with credit comes risk and businesses need to decide how much credit they wish to extend. Financial modelling can help businesses make this call using information from credit rating agencies and publicly declared financials of clients, if they exist.
• Company valuation: This type of financial model requires complex analyses of several variables in order to estimate the value of a company. These models are often created by investment banks and private equity firms.
• Valuation of financial instruments: These models are used to value bonds, futures, options, and other types of financial instruments. These models are the backbone of technology-based trading as they automate complex calculations, such as fair value. Many of the most sophisticated of these algorithms are still in their infancy, but it’s not inconceivable that they may one day replace human traders.

This is but a sample of the types of financial models used by analysts. However, these outlines should illustrate in more specific terms the benefits of financial modelling and how they can help companies plan better business models and manage risk. Now, let’s have a look at this financial modelling case study to see these concepts in action.

A financial modelling case study from the steel industry 

A major steel manufacturer sought the services of a financial modeller to evaluate the different funding options to expand one of their facilities . There were several factors to be taken into account beyond extending the space; equipment needed to be commissioned and imported over an 18 month period. At the same time, the facility needed to conduct business as usual to ensure regular cash flow alongside this foreseen expense escalation.

There were various loans and loan tenors available, alongside an existing overdraft facility. The question for the company board was what would be the optimal mix of funding in order to minimise costs and avoid the need for refinancing or additional loans. To analyse the options and variables, they drafted a financial modeller to carry out liquidity planning. For the purposes of this financial modelling case study , we’ll describe the methodology used to create this type of model and the results achieved.

As a starting point, existing management accounts and budgeting gave an insight into the business as usual cash flow. Escalation dates and factors had to be applied in order to estimate the potential future cash flow situation. In addition, the expansion project capital requirements were estimated and foreign exchange implications analysed, and payment terms and dates determined.

Forecasts were calculated using opening account balances and the predicted changes to historic trends. These estimates had to take into account fluctuations in working capital and the new expansion capital outflows. These were overlaid on existing business cash flow models in order to determine the predicted monthly cash position.

Different loans with their specific interest rates and repayment profiles were then applied to this model to forecast a series of outcomes, expressed via the monthly cash position and the ending cash balance, plus the tax implications. From this analysis, a clear option emerged. This financing scenario was tested via sensitivity analysis, where key assumptions and possible changes to existing cash flows were applied.

The results

These financial modelling tools revealed a clear choice for financing. Further to this, the preferred solution was subject to a series of rigorous sensitivity analyses where key assumptions were applied and scenarios modelled. This allowed the board to quantify the risks in regard to foreign exchange rates, fluctuations in interest rates, changes to payment schedules, and changes in operational costs.

This enabled the board to make decisions that were informed as possible in regard to their choice of financing. Of course, these analyses aren’t cast iron – unexpected events like the pandemic are demonstrative of this – but they are an invaluable basis for decision making. Sure enough, in the wake of the pandemic, many financial modellers are incorporating disaster scenarios into their analyses, so that we can be better prepared for the next black swan event.

Find the right financial modeller

As this financial modelling case study demonstrates, mastering financial modelling requires exceptionally strong mathematical and analytical skills . They’ll need to be fully proficient in Excel and VBA, and as we move into the era of machine learning and AI, these essential skills will also need to be complemented by a strong understanding of programming languages.

Their skills as a business analyst need to translate business needs to financial requirements, and perhaps most crucially, they need to be able to communicate this information to key stakeholders. Certainly, financial modelling requires an excellent technical mind , but you have to be able to explain scenarios and their consequences in plain English (or whichever language you may be speaking).

Above all, it’s these soft skills that set apart a good financial modeller from an excellent one. The ability to understand the business, its requirements, stakeholders’ ambitions, and the magnitude of the impact of external events are critical to helping the business be better prepared for whatever the world economy throws at them. You need much more than just good excel or programming skills.

Source exceptional talent with Outvise

Certainly, going to financial modelling consulting firms is one route to finding an outstanding analytical mind. However, with consulting firms come consulting price tags. In light of this, what’s the most cost-effective way to find an outstanding financial modelling analyst? How can you guarantee good value for money, especially since the exercise is about effective financial management? 

Since the pandemic, promising and seasoned professionals alike have poured into the freelance market – all businesses need to do is connect with them. Outvise was created to forge links between the most talented freelance professionals and corporations. By creating a specialised, curated professional network, Outvise has facilitated companies to make the most effective, efficient use of freelance talent to drive their projects forward.

Discover financial modellers on the Outvise network and ready your organisation for anything.

Gerrit Eloff

Gerrit Eloff has been working in a multicultural and multinational environment for the majority of his career. A qualified actuary through the institute of actuaries in London with extensive experience working with Executive committee members, board members and shareholders, assisting them in defining strategy based on detailed data analysis and predictive financial models.

He has 20 years of broad financial modelling experience spanning across the full business planning cycle, from initial financial assessment, pricing strategies, business sensitivity analysis, valuations, funding structures to investor negotiation modelling.

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Improve your financial modeling skills. Learn M&A, Valuations, CorpFin and other aspects of financial modeling. We will provide sample solutions to the World Cup cases after each stage.

Some of the World Cup cases will cover body of knowledge of different designations. Take part in the World Cup to train for AFM, CFM or other exams under time-pressure!

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Financial modeling world cup is the leading financial modeling competition for everyone interested in finance. participants solve real-life case studies by building financial models in microsoft excel., $25,000 prize fund, compete and claim your share.

The prize fund is split among various categories – worldwide, regional leaders, age group winners, etc. Regardless of the specific categories chosen, the goal of dividing a prize fund is to ensure that everyone who deserves recognition and reward has a fair chance to receive it.

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Promoting trust and accountability.

Benchmark your skills against other finance experts in the world. Ultimately, the best way to benchmark the skills of a finance expert is through their track record of success in their respective field. This may include achievements such as accurate predictions, successful investment decisions, or effective financial management strategies.

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Ultimately, becoming the first financial modeler in your country and region requires hard work, dedication, and a willingness to continuously learn and adapt to new challenges. But with the right mindset and resources, it is an achievable goal that can open up a world of opportunities and contribute to the growth and development of your community.

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5 Financial Forecasting Models and Examples of Use Cases

Jerusha Songate on May 04, 2021

Table of Contents

More baremetrics articles.

Financial forecasting models are used to predict financial outcomes within a specified area of your business, like recurring revenue or payroll. These models then feed into the overall  financial model  for your SaaS business.

Adopting this approach provides you with invaluable insights into your subscription-based business, helping you calculate costs, improve budgeting, and allocate resources. 

In this article, we’ll have a closer look at five different forecasting methods and present examples of use cases.

Try Baremetrics for free to learn more about how your company could benefit from financial modeling.

What Is Financial Forecasting?

Financial forecasting is trying to predict financial outcomes for an organization. Having access to a prognosis helps decision-makers create meaningful strategies and make critical decisions about corporate development.

One of the most coveted numbers that most businesses want to predict is, of course, revenue. But financial forecasting can concern any business area, such as payroll, fixed costs, variable costs, income statements, balance sheets, and capital expenditures.

Many businesses try to create forecasts using Excel but often find that to create thorough financial analysis, financial planning, and long-term budgeting, they need something more advanced. 

Read more: How to Build a Financial Model

Here are five financial forecasting models to help you drive business growth:

1. Top-Down Financial Forecasting Models

This model can come in handy when you want to evaluate a new opportunity and you have no historical data to base your predictions on.

A top-down forecasting model can use the size of a new market as a point of departure and then make a forecast by estimating how much market share your business will be able to grab.

A top-down approach is primarily helpful in the initial phase when you want to evaluate new growth opportunities. 

Read more: The Best Financial Modeling Software for SaaS in 2021

2. Bottom-Up Financial Forecasting Models

If you have access to historical sales data or financial statements, it makes sense to go about your forecasting from the bottom and up. Then you use your existing sales numbers and cash flow statements as the input for calculating future scenarios.

This method will usually be more accurate and more detailed since you are working with actual numbers, so you reduce the assumptions. 

Interested in how your business can benefit from a modern tool for financial modeling? Try Baremetrics for free !

3. Delphi Forecasting Models

The Delphi method is a model where you get your forecast from a group of experts, leveraging a facilitator and continuously collaboratively iterating on hypothesis and analysis to reach a consensus opinion.

A series of questionnaires form the basis of this process, where every questionnaire builds on the previous iteration. This is an efficient way to make sure the entire group gets access to all information.

4. Correlation-Based Forecasting Models

Another way to look at financial forecasting is to identify correlating variables and track how they follow each other. This is a widespread financial forecasting model.

This way of predicting financial outcomes can help decision-makers understand make forecasts based on the relationships between prices and costs, supply and demand, and other factors that affect each other.

5. Statistical Forecasting Models

Statistical models (also called quantitative forecasting models) create relationships between the findings of other disciplines. This approach often uses Gaussian distribution analysis to fit financial inputs and attempts into a classic standard distribution curve.

This can help you figure out how your operation compares to other similar businesses, and you can use this method for benchmarking., growth rate, profitability, and decision-making. 

Read more: The New Era of SaaS Forecasting

Power Laws in Financial Forecasting

Power laws represent a complex and challenging analytic model that is sometimes used in financial forecasting models. They are mathematical functions describing proportional movements between assets.

Power laws are prevalent in the stock market and corporate finance, where they are popular because of their ability to highlight and break down specific momentum trends quickly.

The knowledge derived from using the Power laws approach can be an excellent guide for resource allocation, capital purchases, marketing, and other types of similar internal investments.

Interested in learning more about how you can grow your SaaS company’s revenue?

Read our article: How To Improve Revenue Growth

How Baremetrics Can Help!

Financial forecasting models are an attempt to look into the financial future of a business and estimate what that future will hold. There is never 100% accuracy in the results, unlike working with a financial analyst.

However, financial forecasts are an essential tool in budgeting and growth planning and when making financial decisions.

Baremetrics optimizes forecasting with a broad range of  real-time metrics for churn, MRR , cost of acquisition , business valuation, and other key performance indicators that pertain to financial performance.

The result? SaaS and subscription-based companies like yours make more efficient business decisions and create profitable growth strategies. Investing in this forecasting software is a great way to maximize the impact that resource allocations have on your company’s bottom line. 

Building a comprehensive, growth-focused financial model takes some work and effort to do. But it’s an investment that is worthwhile since the benefits of reliable financial data predictions are critical to growing your business.

Try Baremetrics for free to learn more about how your company could benefit from solid financial modeling.

Baremetrics' financial forecasting application helps make accurate predictions through features such as data integration, historical data analysis, scenario modeling, intelligent algorithms, and real-time updates. It provides clear visualizations of forecasted outcomes. For more information visit:  https://baremetrics.com/features/forecasting  

Financial forecasting software provides several benefits for businesses, including fine-tuning business plans, generating budget templates, tracking historical budgets, comparing projections with actual figures, consolidating budgets across departments, planning for different scenarios, and monitoring budgeting process performance.

Learn about financial forecasting software for SaaS businesses.

• How can financial forecasting tool aid in budget planning and decision-making processes? A financial forecasting tool aids budget planning and decision-making by providing accurate projections, enabling scenario analysis, facilitating resource allocation, monitoring performance, supporting collaboration, and assisting in long-term planning.
• What are the key features to look for when selecting financial forecasting software? When selecting financial forecasting software, key features to look for include: Accurate financial projections Flexible scenario modeling Integration with financial data sources Historical data analysis Collaborative forecasting Real-time tracking and reporting Integration with budgeting and planning Scalability and customization. By considering these key features, you can select financial forecasting software that meets your business requirements and empowers you to make informed financial decisions.
• Can you recommend any software for financial forecasting that integrates with accounting systems? Baremetrics is an essential tool for SaaS financial forecasting software. Baremetrics offers seamless integration with QuickBooks Online and Xero, allowing for the synchronization of financial data between the software and these accounting platforms. This integration ensures accurate and up-to-date financial forecasting and analysis .

Jerusha Songate

Jerusha has a strong interest in SaaS and finding new business opportunities. She writes for Baremetrics as part of her passion for business journalism.

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