Financial Modeling for Beginners
Let's be honest, financial modeling is not that threatening—and I promise you can do it! If just thinking about building models makes you uncomfortable, don't click away just yet! Financial Modeling is just structured thinking that is applied - in Excel no less - and, yes, it is something you can learn progressively.
Financial modeling can be defined simply as creating a simplified representation of a business scenario or action. You group assumptions, historical data and formulas together in an organized way - often in Excel - to determine future performance or assess a specific deal. It is like building a "what-if" machine to help you visualize what tomorrow will look like in terms of your finances.
You may ask yourself, why should I learn it? Well, here is a huge motivator. Financial models drive decisions. Whether it's a new product investment, more complicated acquisitions, or just basic budget management, having a good model puts you in the position to evaluate outcomes, analyze risks, and substantiate your decisions with numbers, not instinct.
The Building Blocks: A Beginner's Roadmap
Define the Purpose: What is your model for? Projected revenue? Business valuation? Cash flow planning? You will want to be clear on the purpose, start with the end in mind.
Choose a Model Type: The meat and potatoes is likely the three-statement model: income statement, balance sheet, and cash flow statement. You then can model in discrete models like a DCF, M&A, or LBO as appropriate in your complexity:
Get Your Inputs: You have to find the data: sales, costs, salaries, expenses, CAPEX, depreciation, interest, and so on. You can look at your past years' financials, investors report, or from filings. What is essential is that you model to real numbers.
Build the Model in Excel: You will have to build a logical flow in linking your statements together: revenue - costs = profit to cash. It may feel like busy work at first, but the goal is for the data to flow cleanly across multiple tabs that will be linked.
Include Scenarios: Don't just model—create a tool. Add "what if" cases: growing market, flat sales, or recession. This flexibility enables you to effectively turn your model into a decision making tool.
Refine with Industry Tools: Excel is your base, solid platform for thinking, formulas, scenarios, formatting, and fast navigation. Users invariably will layer in add-ins or shortcuts—but build strong fundamentals first.
Here's the fun part: once you get your model to flow accurately, you will start seeing "patterns". You will be able to test pricing models, revenue declines, or capital needs before they encounter the reality of your business. You will begin understanding the story that lies within the numbers, versus just copying and pasting.
Quick Reference: What to Include in your Beginner Starter Checklist:
Determine why you are modeling - what is the outcome you care about.
Follow the simple process of building a three-statement model, before delving into either special models or specialty models.
Generate your logic in steps from Excel - inputs, links, outputs.
If you want to, ensure your model has scenario toggles that allow you to test new assumptions instantly.
Good formatting should not be confused with aesthetic beauty, it can help to minimize errors.
Financial modeling does not need to be a scary exercise of torture in Excel. Financial modeling is based on a sound method of thinking logically and structuring that thought, with the necessary consideration for numbers, flexibility, and strategic interpretation. If you develop strong foundational knowledge it is much more than building spreadsheets, it is developing foresight.
Sources:
https://www.wallstreetoasis.com/resources/financial-modeling/financial-modeling-for-beginners
https://macabacus.com/blog/financial-modeling-introduction also remember to remove the source bits