Technology has transformed every industry, including finance. While software suites are now available to analyze and model nearly any data, fewer financial professionals know that Microsoft Excel – the standard spreadsheet program installed on financial professionals’ machines worldwide – offers the tools to create a number of financial models.
The next time you’re tempted to transfer Excel data to another program for modeling purposes, first check to see whether Microsoft Excel will do the work for you. Financial models you can create in Microsoft Excel include:
Company Financial Models
Sell-side and buy-side analysts frequently use Excel to build the spreadsheets they need to hold information on the likely financial results of a company. Building company financial models in Excel is a relatively simple process: input estimates for key items, ensure the mathematical formulas are correct, and organize the data according to your needs. Once the basic data is in place, Excel allows users ot build models for income statements, balance sheets, and cash flow statements.
Whether you, as a buy-side analyst, actually build your own company models from scratch or repurpose previously-built models, Excel allows you to “stress test” them easily, seeing how the numbers respond to changes in variables. Whether you prefer simple metrics like price-earnings, price-earnings-growth, or EV/EBITDA, or more complex methods like a discounted cash flow model, Excel makes valuation modeling simple, yet powerful.
Building a discounted cash flow model in Excel is simpler than it first appears. Use one row to hold year-by-year cash flow estimates, with rows beneath holding growth estimates, discount rates, shares outstanding and cash/debit balance. Establish which is the “year 1” starting estimate and which are the estimates for coming years. Input a discount rate, the shares outstanding, and net cash/debit balance in individual cells, then use the spreadsheet’s NPV (net present value) function to process the numbers.
Although Microsoft Excel makes previously-complex modeling much simpler, combining sophisticated models with professional judgment and discretion offers the best chance of making solid investment decisions. Your recruiter can help you find the people who possess and use this experience and professional judgment in combination with technology.
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