3 TIPS How To Automate Your Financial Models | FinModelsLab

Financial planning is one of the key factors in the success of a business. Regardless of the size of the business, whether a small startup or a corporate level organization, it is crucial that we know the path that the business is heading and what possible financial actions are needed to achieve financial growth.

Financial modeling may be one of the most indispensable tools that financial analysts have. It is a tool used for providing a clear depiction of the forecasted financial performance of a company. Its importance is entrenched in its capacity to enable better financial decisions within a company. It involves the mathematical representation of crucial financial as well as operational data that can be used to evaluate how businesses should react to particular economic events.

It contains the many different aspects of financial accounting and is structured around the three main financial statements of accounting — the income statement, balance sheet, and the cash flow statement. These spreadsheets detail the past financial data of the business, forecast its future financial performance, and determine its risk and return figures.

What Are The Uses Of Financial Modeling

There are numerous beneficial uses of financial modelling depending on what the organization aims to achieve. For most corporate financing activities, such as selling the business or acquiring more debt, financial models are very helpful and usually the first analysis that is prepared.

Moreover, financial models are used for different purposes including:

• To gain insight on how an organization should react to certain financial & economic situation.
• Help in estimating how much money the company needs to borrow for operational expenses or growth.
• Determining the project’s risk level as well as the preparation that needs to be done.
• Solving the financial issues of the business such as slow growth, declining market share, and high rate of attrition.
• Assessing the value of the firm for initial public offering or sale of business.
• Comparative analysis for investment purposes.

What Is The Financial Modeling Process

Now that we have a clear understanding of what financial modeling is as well as its uses and purpose, we will dive into the financial modelling process. While there are several financial modeling platforms available out there, in practice, the most-used financial modeling platform is through the use of Microsoft Excel spreadsheet.

While there are numerous financial modeling software tools available in the market today, most financial analysts still prefer the good old way of customizing financial models through the use of Excel.

The financial modeling process follows these few standard steps:

1. Step: Enter three to five years of historical financial information.
2. Step: Interpret historical performance.
3. Step: Develop assumptions about future performance.
4. Step: Utilize the assumptions to forecast and link it to the income statement, balance sheet, and cash flow statement.
5. Step: Do a discounted cash flow analysis.
6. Step: Make a sensitivity analysis.
7. Step: Do an audit and stress test the model.

3 Tips To Automate Your Financial Models

According to a report from EY Finance navigator, there are around 56 million serviceable available markets for financial model software, which is the reason why there is an influx of different financial modeling software being introduced in the market.

While it may be true that Excel is still the financial modeling platform of choice by most financial analysts, the emergence of financial modeling software gives the analysts the dilemma on whether to continue using Excel or to migrate to a more advanced financial modeling software.In terms of customizations, Excel has an edge since it can be built on scratch, structured, and formatted according to the requirement of the organization. However, it is prone to errors.

Financial modeling software on the other hand scores high when it comes to standardization, error prevention, and accuracy. It is likewise better when it comes to risk and sensitivity analysis. Another advantage of financial modeling software is that it can handle diverse and complex data sets, something that Excel has limitations too.

For those who are still thinking of whether to automate their financial models or stick to the traditional Excel, here are some tips on how to skillfully automate your financial models.

Re-assess The Goal Of Your Financial Model

The decision on whether to automate your financial models lies on a number of factors, like the cost of the software, the market size of your sector, the insights you want to get from it, and more importantly, the goal of the financial model. If your business handles diverse and complex data, and your goal is more on risk management analysis, then it is advisable to use financial modeling software rather than the traditional Excel.

Study The Emerging Trends

Right now, it is easy to admit that many business intelligence tools and financial modeling software have its limitations. There are areas that they score over Excel and there are areas that they don’t. But we are talking of the current scenario, and with the current speed of development, these tools might evolve and improve their features. There are fintech resources that we can follow so that we can be updated on the current trends.

Find The Software That Best Suit Your Business Needs

There are many financial modeling software available in the market with varying degrees of function. Software with a high level of precision is ideal for risk management and sensitivity analysis, while others can scale diverse and complex data sets. Choose the software that would best solve all your financial insight issues and would help you make better financial decisions.

To Automate Or Not, That Is The Question

The traditional way of financial modeling may have the upper hand now, but with technology seemingly having the answer to almost everything nowadays, it’s just a matter of time before these financial modeling software and business intelligence tools cope up and make the analysts job a whole lot easier. Until that time, let’s make do with what technology offers.