Professional Financial Modeler

Certification for Financial Modeling Professionals
Professional Financial Modeler

Certification for Financial Modeling Professionals

About Financial Analysis & Financial Model - Professional Financial Modeler
About Financial Analysis & Financial Model

Financial analysis is a field in finance which deals with analyzing the financial aspect of a company, project or investment. Financial analysis is vital in many organizations and projects as the basis for making an informed decision on budget, strategy or investment. Financial analysis requires some understanding in several interdisciplinary subjects namely:

  1. Accounting
  2. Financial Model
  3. Business quantitative and statistics
  4. Economics
  5. Financial mathematics

Accounting is the basis for developing company financial statements, is crucial for a financial analyst. An analyst does not need to know in detail about accounting process and nor financial analysis needs to conform to accounting standard, but analyst still needs to understand to how an account is calculated to enable correct analysis.

Business quantitative or statistics used for business is focused mainly on methods to conduct forecast and calculate risks, that is for future prediction as an analyst focuses on analyzing the future.

Economics in practical form is required as an important factor in conducting the analysis. In a financial model, it is an essential component to generate some fundamental assumptions used in creating the model for the company

Financial mathematics is needed to understand the relationship and behavior of concepts in finance.

However, financial analysis is different from accounting. Accounting deals with the reporting the historical financial condition of a company. While financial analysis deals with making a financial prediction for the future of a company or project. The realm of financial analysis in the PFM Curriculum can be depicted by using the following diagram:

In conducting financial analysis or preparing a financial Model for companies and projects, an analyst needs to develop several elements:

  1. Forecast
  2. Prediction is made on each significant assumption, where the assumptions are predicted through the use of various tools including quantitative techniques.

  3. Financial Projection
  4. The prediction of future financial statements and condition of the company developed based on multiple company assumptions.

  5. Valuation
  6. Determine the value of equity, investment or project. Primarily used by capital market analysts.

  7. Feasibility
  8. Determine whether a project is feasible for development or acquisition. Mostly used by project managers.

  9. Credit Analysis
  10. Determine the repayment capacity of a company or project and the viability for a borrower to repay its liabilities. Mostly used by credit analysts, especially working in banks and financial institutions.

  11. Risk Analysis
  12. Analyzing the level of risk and sensitivity and the probabilistic nature of a model. Used primarily to control and manage the risk of an investment or project.

In short, the purpose of conducting financial analysis is either to predict a single financial aspect or assumption (called forecasting) continued with predicting future financial condition (projection). The purpose is to prepare a budget, conduct valuation of a company, determine whether a project is feasible and determine whether the company or project has the financial capability to service its liabilities especially to various creditors.

The result of the calculations must become the basis for conducting various analytical calculations such as financial ratios. Then an analyst has to perform a risk analysis to determine the potential deviation from the resulting prediction.

There are various methods, concepts, and theories in finance. Many are highly theoretical. An analyst must understand the concepts and know how to apply them in a different situation

To conduct a comprehensive analysis of a company or project, development of a financial model is a must. The financial model is the knowledge for building an abstract representation (a model) of a real-world financial situation needed to conduct a thorough financial analysis. The financial model is a mathematical model based spreadsheet (mostly on Microsoft Excel) designed to represent (a simplified version of) the performance of a company or project.

Programming languages and software can be utilized to create a more sophisticated model with the ability to perform specific functions. However, models with basic Excel functionality already can provide high-quality analysis given that the development is done by using sound methodology.

The financial model is crucial for predicting the future of a company or project and become the basis for decision making in regards to planning, investment, lending, acquisition, and structuring. Financial models done by investors and analysts worldwide is responsible for the determination of global asset prices and determine the realization of projects in all sectors.

Copyright International Financial Modeling Institute © 2023. All Rights Reserved.