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How can I get started learning financial modeling?

I'm a sophomore in college, getting ready to apply for internships in corporate finance or banking or investing, and I want to be able to show finance companies/firms that I'm qualified to work for them. I want to teach myself financial modeling in excel. What kind of models should I try to make and what resources can I use to learn how to build those models? #finance #investment-management #investment-banking #corporate-finance #financial-analysis

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Jean-Yves’s Answer

I would suggest you to read "Corporate and Project Finance" by Edward Bodmer. It's very insightful book about the types financial models depending on what you're aiming for.
Thank you comment icon Hi Jean-Yves! Thank you so much for your reply above! As a follow up question, I was wondering how you yourself learned financial modeling? Do you find that most people in your field end up teaching themselves from books? Or do people enter the realm of finance and learn as they go? Any info you could provide would be greatly appreciated! Thank you so much! David Ohta COACH
Thank you comment icon Hi David, I've learned financial modeling mostly from books. I must precise I’m specialised in corporate finance which does not requires the same skills as market finance. The first requires more skills in accounting, the second more in stochastic calculus. Most people I know came in the field with at least a 4 years degree in finance and/or accounting but are usually forced to learn much more of the job in practicing. I should also add that right now I'm working in Cameroon and here financial analysis is more about corporate finance than market finance, compared to developed country such as Canada (where I did my graduate diploma in finance) where finance is usually about market finance. Jean-Yves RISSOUK A MOULONG
Thank you comment icon Thank you so much for your reply! The book you suggested is awesome. If I could ask one more follow up question, is there any reason why you gravitated towards corporate finance over market finance? David Ohta COACH
Thank you comment icon I found corporate finance more interesting, maybe because it's closer to business management than market finance. I feel market finance is more disembodied, sometimes more disconnected from real economy. You can get an idea, for example, by studying the causes of successive stock market crashes. "The Return of Depression Economics and the Crisis of 2008" by Paul Krugman is an interesting book on the subject. Jean-Yves RISSOUK A MOULONG
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Jared’s Answer, CareerVillage.org Team

If you are feeling confident and want to achieve something ambitious, I recommend learning how to build a DCF (Discounted Cash Flow) valuation model for a publicly traded company, and then use that model to evaluate the current share price. Is it too high? Too low? Reasonable, but only if you're optimistic about the company's growth potential? Building a few DCF models for publicly traded companies will provide you with some good stories to discuss in interviews, and you might even be able to get your foot in the door by sending along a summary report of one or two models to stand out from the "regular" internship applicant. It's a decently steep learning curve, but not rocket science.


How to learn


Training companies
It's relatively common for investment banks or other finance firms to hire outside companies to come in and provide training to new employees. The ones I've heard the most about is http://trainingthestreet.com/ and https://www.wallstreetprep.com/ but there are competitors. Unfortunately it doesn't look like they offer many free resources for self-learners. You could contract them to teach you, although I can't vouch for the results. Here's a NYTimes Dealbook post on that trend.


MOOCs
UDemy has a DCF modeling course: link
Khan Academy has some solid core finance concepts sessions: link


Self-study
If you want to follow along with books, for example, I'd recommend either the Rosenbaum-Pearl book or Tim Koller's Valuation book. Full disclosure: I worked for Tim Koller for a couple of years and really loved this book. It's truly one of the best, IMHO.
You might also benefit from seeing some sample spreadsheets to begin with. Here are a bunch of spreadsheets published by Aswath Damodaran, one of the most popular finance professors while I was at NYU Stern: here
Another side note: Macabacus is a company that sells excel plugins for finance, but they also have some self-training resources here.


Some models I don't think you should start with



  • Basic financial projection: For example, a projection of the income statement, balance sheet, and cashflow statement of a sample company. You would learn a lot about accounting, but the finance concepts here wouldn't be very difficult, and you wouldn't have much of interest to discuss in an interview for a finance or investing internship.

  • LBO models: These specialty models are used for private equity transactions only. They'll be useful for applying to PE jobs, or to the leveraged finance group at an investment bank, but not for "general" finance interviews.

  • M&A models: These specialty models are designed to support mergers or acquisitions only. Not normal to cover in a general finance industry internship interview.

  • Price to earnings based valuation models: Discounted Cash Flow (DCF) models will force you to learn more fundamental finance concepts, which is a healthier place to start. You should also be aware that there is a rather large range of opinions in the industry on what forms of valuation are best. Some people swear by PE. Some swear by DCF. Some use other frameworks. Be nimble, and if at all possible avoid getting into an argument with your interviewer about which valuation methodology is better than another unless you are ready to win the argument and you know that the interviewer will reward honest intellectual discussion.


Source: I graduated from NYU Stern with a degree in finance and then worked at McKinsey for 6 years in (what was then called) the Corporate Finance Practice. I know people who work in investment banks or at funds, and have interviewed for both types of firms.
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Josh’s Answer

For general financial excel modeling examples, I would recommend a book called "Mastering Financial Modelling in Microsoft Excel" by Alistair Day. I found it helpful to dig into the excel examples provided and figure out their structure and logic, which can then be applied to your own modelling.
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Mike’s Answer

There are a tonne of good places to pick up the basics. The best way is to get stuck and build a simple financial model from scratch, but you need to be aware there are a number of different types of models with different purposes, and hence different functions and content.

I often use www.edbodmer.com as a reference for how specific mechanisms can be created.

Once you've got started but are still in the early days, it's also a good idea to have a read of the Fast Standard (www.fast-standard.org). It gives a good set of "ground rules"; while it's not slavishly followed by everyone in the industry it's a very good starting point for building good models
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Christan’s Answer

Look up Modano. Corality and BPM also have some resources which won't necessarily help you make DCFS. But it will definitely help you use excel without a mouse and improve your efficiency!
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Sean’s Answer

As many have mentioned above, constructing a discounted cash flow based on online examples is a very good place to start. Another source is the Shannon Pratt text on business valuation. First, replicate a 3 or 5 year DCF. Don't forget that one of the most important inputs to the DCF is the discount rate. Second, construct a discount rate using a weighted average cost of capital which includes both a cost of debt and equity. Third, you will need a long term growth rate to capture cashflows into perpetuity after the 3 or 5 year period. Lastly, it is recommended to use more that one valuation approach. So while income approach or DCF is one approach, the market approach based on guideline public company multiples or guideline transactions is another. Understanding how similar companies are trading in the marketplace based on revenue of earnings multiples can help you understand whether the DCF is producing reasonable results as it acts as a check. Best of luck!
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Joseph’s Answer

If you're a total beginner - Start with learning how to find the Net Present Value of cash flows. In order of least to most difficult try valuing the cash flows from Lump Sums, Annuities, Bonds, Irregular Cash Flows. Excel has some pretty basic functions that can handle the math but understanding the discounting process involved is a fundamental concept in finance.


If you have some of the basics down and know a little accounting - Try linking 3 financial statements in excel (Balance Sheet, Income Statement, Statement of Shareholder's Equity). You tube has some very straight forward tutorials that are maybe 45-1hr long. You wont become an expert but its a great place to start. The more accounting knowledge you have, the easier it will be to follow along.


Once you have that down, there are a lot of things you can build on top - Revenue forecasts, DCF valuations, LBO model, M&A model, etc.

Joseph recommends the following next steps:

I'm a fan of following along with youtube tutorials, the Corporate Finance Institute has a channel that I like. See if there is one you can follow along with.
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