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Hands-On Financial Modeling with Excel for Microsoft 365
Hands-On Financial Modeling with Excel for Microsoft 365

Hands-On Financial Modeling with Excel for Microsoft 365: Build your own practical financial models for effective forecasting, valuation, trading, and growth analysis , Second Edition

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Hands-On Financial Modeling with Excel for Microsoft 365

Chapter 1: An Introduction to Financial Modeling and Excel

If you asked five professionals the meaning of financial modeling, you would probably get five different answers. The truth is that they would all be correct in their own context. This is inevitable since the boundaries for the use of financial modeling continue to be stretched almost daily, and new users want to define the discipline from their own perspective.

To provide some clarity, in this chapter, we will learn some popular definitions and basic ingredients of a financial model and what my favorite definitions are. You will also learn about the different tools for financial modeling that currently exist in the industry, as well as those features of Excel that make it the ideal tool to use in order to handle the various needs of a financial model.

By the end of the chapter, you should be able to hold your own in any discussion about basic financial modeling.

We will cover the following topics:

  • The main ingredients of a financial model
  • Understanding mathematical models
  • Definitions of financial models
  • Types of financial models
  • Limitations of Excel as a tool for financial modeling
  • Excel—the ideal tool

The main ingredients of a financial model

First of all, there needs to be a situation or problem that requires you to make a financial decision. Your decision will depend on the outcome of two or more alternative scenarios as described in the following subsections.

Financial decisions can be divided into three main types:

  • Investment
  • Financing
  • Distributions or dividends

Investment

We will now look at some reasons for investment decisions:

  • Purchasing new equipment: You may already have the capacity and know-how to make or build the equipment in-house. There may also be similar equipment already in place. Considerations will thus be whether to make, buy, sell, keep, or trade in the existing equipment.
  • Business expansion decisions: This could mean taking on new products, opening up a new branch, or expanding an existing branch. The considerations would be to compare the following:
    1. The cost of the investment: Isolate all costs specific to the investment, for example, construction, additional manpower, added running costs, adverse effects on existing business, marketing costs, and so on.
    2. The benefit gained from the investment: We could gain additional sales. There will be a boost in other sales as a result of the new investment, along with other quantifiable benefits. Regarding the return on investment (ROI), a positive ROI would indicate that the investment is a good one.

Financing

Financing decisions primarily revolve around whether to obtain finance from personal funds or external sources:

  • Individual: For example, if you decided to get a loan to purchase a car, you would need to decide how much you wanted to put down as your deposit so that the bank would lend you the difference. The considerations would be as follows:
    • Interest rates: The higher the interest rate, the less you would seek to finance externally.
    • Tenor of the loan: The longer the tenor, the lower the monthly repayments, but the longer you remain indebted to the bank.
    • How much you can afford to contribute: This will establish the least amount you will require from the bank, no matter what interest rate they are offering.
    • Amount of monthly repayments: How much you will be required to pay monthly to repay the loan.
  • Company: A company would need to decide whether to seek finance from internal sources (approach shareholders for additional equity) or external sources (obtain bank funding). We can see the considerations in the following list:
    • Cost of finance: The cost of finance can be easily obtained with the interest and related charges. These finance charges will have to be paid whether or not the company is making a profit. Equity finance is cheaper since the company does not have to pay dividends every year, also the amount paid is at the discretion of the directors.
    • Availability of finance: It's generally difficult to squeeze more money out of shareholders unless perhaps there has been a run of good results and decent dividends. So, the company may have no other choice than external finance.
    • The risk inherent in the source: With external finance, there is always the risk that the company may find itself unable to meet the repayments as they fall due. This exposes the company to all the consequences of defaulting, including security risk and embarrassment among other things.
    • The desired debt-to-equity ratio: The management of a company will want to maintain a debt-to-equity ratio that is commensurate with their risk appetite. Risk takers will be comfortable with a ratio of more than 1:1, while risk-averse management would prefer a ratio of 1:1 or less.

Dividends

Distributions or dividend decisions are made when there are surplus funds. The decision would be whether to distribute all the surplus, part of the surplus, or none at all. We can see the considerations in the following list:

  • The expectations of the shareholders: Shareholders provide cheap funds and are generally patient. However, shareholders want to be assured that their investment is worthwhile. This is generally manifested by profits, growth, and in particular, dividends, which have an immediate effect on their finances. The funds are considered cheap because payment of dividends is not mandatory but at the discretion of the directors.
  • The need to retain surplus for future growth: It is the duty of the directors to temper the urge to succumb to pressure to declare as many dividends as possible, with the necessity to retain at least part of the surplus for future growth and contingencies.
  • The desire to maintain a good dividend policy: A good dividend policy is necessary to retain the confidence of existing shareholders and to attract potential investors.

You should now have a better understanding of financial decision making. Let's now look at mathematical models that are created to facilitate financial decision making.

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Key benefits

  • Explore Excel's financial functions and pivot tables with this updated second edition
  • Build an integrated financial model with Excel for Microsoft 365 from scratch
  • Perform financial analysis with the help of real-world use cases

Description

Financial modeling is a core skill required by anyone who wants to build a career in finance. Hands-On Financial Modeling with Excel for Microsoft 365 explores financial modeling terminologies with the help of Excel. Starting with the key concepts of Excel, such as formulas and functions, this updated second edition will help you to learn all about referencing frameworks and other advanced components for building financial models. As you proceed, you'll explore the advantages of Power Query, learn how to prepare a 3-statement model, inspect your financial projects, build assumptions, and analyze historical data to develop data-driven models and functional growth drivers. Next, you'll learn how to deal with iterations and provide graphical representations of ratios, before covering best practices for effective model testing. Later, you'll discover how to build a model to extract a statement of comprehensive income and financial position, and understand capital budgeting with the help of end-to-end case studies. By the end of this financial modeling Excel book, you'll have examined data from various use cases and have developed the skills you need to build financial models to extract the information required to make informed business decisions.

Who is this book for?

This book is for data professionals, analysts, traders, business owners, and students who want to develop and implement in-demand financial modeling skills in their finance, analysis, trading, and valuation work. Even if you don't have any experience in data and statistics, this book will help you get started with building financial models. Working knowledge of Excel is a prerequisite.

What you will learn

  • Identify the growth drivers derived from processing historical data in Excel
  • Use discounted cash flow (DCF) for efficient investment analysis
  • Prepare detailed asset and debt schedule models in Excel
  • Calculate profitability ratios using various profit parameters
  • Obtain and transform data using Power Query
  • Dive into capital budgeting techniques
  • Apply a Monte Carlo simulation to derive key assumptions for your financial model
  • Build a financial model by projecting balance sheets and profit and loss

Product Details

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Publication date : Jun 17, 2022
Length: 346 pages
Edition : 2nd
Language : English
ISBN-13 : 9781803248936
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Product Details

Publication date : Jun 17, 2022
Length: 346 pages
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Language : English
ISBN-13 : 9781803248936
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Table of Contents

18 Chapters
Part 1 – Financial Modeling Overview Chevron down icon Chevron up icon
Chapter 1: An Introduction to Financial Modeling and Excel Chevron down icon Chevron up icon
Chapter 2: Steps for Building a Financial Model Chevron down icon Chevron up icon
Part 2 – The Use of Excel Features and Functions for Financial Modeling Chevron down icon Chevron up icon
Chapter 3: Formulas and Functions – Completing Modeling Tasks with a Single Formula Chevron down icon Chevron up icon
Chapter 4: Referencing Framework in Excel Chevron down icon Chevron up icon
Chapter 5: An Introduction to Power Query Chevron down icon Chevron up icon
Part 3 – Building an Integrated 3-Statement Financial Model with Valuation by DCF Chevron down icon Chevron up icon
Chapter 6: Understanding Project and Building Assumptions Chevron down icon Chevron up icon
Chapter 7: Asset and Debt Schedules Chevron down icon Chevron up icon
Chapter 8: Preparing a Cash Flow Statement Chevron down icon Chevron up icon
Chapter 9: Ratio Analysis Chevron down icon Chevron up icon
Chapter 10: Valuation Chevron down icon Chevron up icon
Chapter 11: Model Testing for Reasonableness and Accuracy Chevron down icon Chevron up icon
Part 4 – Case Study Chevron down icon Chevron up icon
Chapter 12: Case Study 1 – Building a Model to Extract a Balance Sheet and Profit and Loss from a Trial Balance Chevron down icon Chevron up icon
Chapter 13: Case Study 2 – Creating a Model for Capital Budgeting Chevron down icon Chevron up icon
Other Books You May Enjoy Chevron down icon Chevron up icon

Customer reviews

Rating distribution
Full star icon Full star icon Full star icon Full star icon Empty star icon 4
(5 Ratings)
5 star 60%
4 star 20%
3 star 0%
2 star 0%
1 star 20%
MarkD Jun 17, 2022
Full star icon Full star icon Full star icon Full star icon Full star icon 5
I really liked this book. The author explains things in a clear and concise way. There's no fluff. This is a book that would be great for a beginner or intermediate financial modeler that is looking to up their skills. I particularly like the case studies at the end of the book. I really think this is a great book for the early to early mid career analyst who is looking to improve their skills. Trust me, this book will get you there if you follow it through.
Amazon Verified review Amazon
Judy Umlas Jun 20, 2022
Full star icon Full star icon Full star icon Full star icon Full star icon 5
I am an excel expert and MVP, but have not felt skilled in the area of financial modeling. Until I read this book. Aside from the financial skew, it also details many "basic" functions one could use in financial modeling, like VLOOKUP, CHOOSE, IF, and more, plus the very latest functions like XLOOKUP, FILTER, SORT, UNIQUE. Writing about things like Asset & Debt Schedules, or Ratio analysis, Valuation, and more opened my eyes to topics I never heard of! Using Case studies also enhances the reader's understanding of this feature-filled book. Highly recommended!
Amazon Verified review Amazon
Orokunle Jun 17, 2022
Full star icon Full star icon Full star icon Full star icon Full star icon 5
The case study of the book provides an excellent example of how to extract BS, PNL and other relevant Financial data. This is helpful when applying it to other case studies in my class! Another interesting point is that the materials are so easy to learn and serves as a go to resource for Financial modelling.what I'll like to see, perhaps on future editions could be more examples at the summary section of each chapter. In the overall, I would recommend this book other students.
Amazon Verified review Amazon
Rachy Jun 20, 2022
Full star icon Full star icon Full star icon Full star icon Empty star icon 4
This book has helped me regain my interest and build confidence in financial analysis. Easy to follow and non-complicated learning tools. Good examples to work through.
Amazon Verified review Amazon
Rami Chehab Nov 22, 2022
Full star icon Empty star icon Empty star icon Empty star icon Empty star icon 1
The book seems to lack resources in providing excel files and questions/solutions to support students learning. I wish the authors consider creating questions and also provides the excel files.
Amazon Verified review Amazon
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