Definition of Financial Modeling:
Financial modeling is the act of creating an abstract representation (called a model) of a real-world financial situation. Investment bankers and other finance professionals frequently use financial models to answer questions about the past, present or future performance of a financial asset or portfolio of a business, project or investment.
Because of their explanatory or predictive power, certain types of financial models are used frequently to represent common financial scenarios. Some of the most common financial models include:
In addition, certain industries have different characteristics and drivers that necessitate the use of specific financial modeling tools and methods.
Some industries such as the Technology, Consumer and Retail categories operate along similar lines and can be analysed using conventional methods.
Others such as Healthcare, Industrials and Utilities somewhat different.
Then there are certain industries such as Financial Institutions, Oil, Gas & Mining, and Real Estate and REITs that are so different that specialized financial modeling methods are called for.
Here’s a quick run-down of what you should know for these industries:
In real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.
There are three main types of real estate financial modeling, which we explore in our in-depth article on Real Estate Financial Modeling.
Unlike “normal companies” that sell products to customers, banks and financial institutions primarily sell money.
They get money from customers (deposits), pay out a certain interest rate on it, and then take that same cash and loan it out to other customers, businesses, and large companies at a higher interest rate.
As a result, bank and financial institution modeling is whole different league, which we cover in this article on Bank and Insurance Modeling 101.
Oil & gas, mining, and other natural resource companies have a simple business model: find and extract valuable stuff from the ground, turn it into something useful, and then sell it to customers.
But there’s a twist: market prices are generally outside the control of a single supplier, which introduces some interesting complexities. We explore some of the nuances of in our in-depth article on Oil & Gas Modeling 101 here.
Financial modeling skills are sought-after in a number of high-paying and prestigious careers, including:
Investment Bankers assist companies in raising capital and executing transactions such as mergers and acquisitions (M&A).
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 firms raise capital that is invested in early-stage, high-growth companies with a view to exiting via acquisition or IPO.
Hedge fund managers raise capital from institutional investors and accredited investors and invest it in financial assets.
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 focuses on acquisitions, divestitures, joint venture (JV) deals, and partnerships internally at a company.
Equity research relates to the sell-side role at investment banks where you make Buy, Sell, and Hold recommendations on public stocks.
It’s difficult to pinpoint salaries and bonuses for professionals with financial modeling skills
because they vary widely – and titles sometimes differ between different companies and industries, making exact comparisons difficult.
So, these are very rough, broad ranges based on what you might earn at a large company in a major financial center.
|Position Title||Investment Banking||Private Equity||Hedge Funds||Corporate Development|
|Junior Analyst||$100K - $150K|
|Analyst||$85K - $95K||$100K - $150K||$200K - $600K|
|Senior Analyst or Sector Head||$500K - $1M|
|Associate||$250K - $400K||$150K - $300K||$120K - $160K|
|Senior Associate||$250K - $400K|
|Manager||$500K - $3M||$190K - $240K|
|Vice President (VP)||$450K - $700K||$350K - $500K|
|Director / Senior Vice President (SVP) / Principal||$500K - $1M||$450K - $700K||$300K - $400K|
|Managing Director (MD)||$1M+||$700K - $2M||$500K - $1M+|
However if you’re looking for topic-specific introductions, here are some good starting points:
PROJECTING THE 3 FINANCIAL STATEMENTS
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Having a strong knowledge of financial modeling is a prerequisite to break into fields such as investment banking, private equity and hedge funds.
Organisations have shifted from “hiring raw graduates and training them on the job” to expecting new hires to be able to add value from day one.
That’s why many aspiring professionals invest in specialized financial modeling training to help them get noticed, get hired, and get promoted.
Some of the financial modeling courses offered by Mergers & Inquisitions and Breaking Into Wall Street include:
Completing these courses will help you win interviews and job offers for roles that pay $150K+ and provide you with a prestigious and lucrative career path.