We have taught analysts from hundreds of companies to build financial models. Financial modelling proficiency requires skills that take time to acquire, develop and perfect.
Sometimes the difficulties students have are related to how to build their model. More often, difficulties relate to what it is they need to model. Then, once the modeller understands how a particular area of a business works commercially, it is much more straightforward to create a spreadsheet model.
We recommend that students begin with a sound conceptual understanding of the requirements for the model. If they are confident that they understand how an area of the business works, they may get on with the Excel modelling. If not, they should spend the time required up front to acquire that understanding.
Conceptual understanding may be acquired by talking to people within the business who understand the business situation. And creating flow diagrams that set out the commercial and financial ingredients of the business can help.
We suggest looking at the line item being modelled—for example “Revenue”—and to keep asking the question “what drives that?” until you cannot go any further. The sample flow chart below shows what this might be like.
Comments
I am quite sure that putting the advices contained in ‘BUSINESS ANALYSIS LIFECYCLE EBOOK: CONCEPTUAL MODELLING’ into practice will enable one to build spreadsheet financial models for any business situation with ease and efficiency. Thanks for the information.