How Difficult is it to Learn Financial Modeling? (2024)

Are you curious about learning financial modeling but worried it might be too difficult? Of course, the challenge that comes with learning a new skill is somewhat subjective. The experience you have learning financial modeling depends on factors like your knowledge of basic accounting terminology and practices, as well as your fluency in working with Microsoft Excel. No matter your current schedule or comfort level with financial modeling, plenty of tools are available to help make learning more manageable than you might think.

What is Financial Modeling?

Financial modeling is the process of evaluating a company’s past performance to predict the likelihood of various financial outcomes. Those who create financial models rely on financial forecasts to do so. The assumptions in a forecast are played out using the organization’s financial statements to predict how various statements may look in the future. Since these models are based on financial statements, they are typically generated monthly, quarterly, or yearly. It’s common for financial models to be constructed using manual data entry in an Excel spreadsheet.

Financial modeling is a valuable tool for estimating how a business or a specific project will perform based on relevant factors, as well as risk assumptions and growth, then evaluating their impact. This process helps to present a concise understanding of the variables used to make financial forecasts. Those who create financial models either build them from scratch or work with existing models, making changes based on newer data that’s become available since its creation. Because financial situations are complex and can change quickly and rapidly, financial modeling helps to create a detailed understanding of the different components.

Read more about what financial modeling is and why you should learn it.

What Can You Do with Financial Modeling?

Without well-executed financial modeling, any business operation would be analogous to a ship floating aimlessly in the sea with no navigation system. Although one could use gut instinct to steer the ship in the correct direction, there would be no guarantee that this course would be accurate. The more sound a financial model is, the less unnecessary risk a business will likely encounter. And the less likely it will be to drift aimlessly.

Financial modeling has numerous applications across industries. Strong financial models are the backbone of many businesses and are a critical component to help them continue to grow and mitigate risk. Financial models provide a way to perform a detailed analysis of all possible financial outcomes of a business decision. These models seek to avoid loss as well as increase profits.

Financial modeling is a powerful tool for a range of financial analysis tasks. It can help an organization budget for the future and analyze the company’s performance against goals and targets. It also can be used for business valuation. Financial models allow individuals to compare one company’s performance against its competitors. It is often used to analyze financial statements, ratios, and capital structure, as well as to estimate financial metrics for new projects. Not only are these models imperative for solving problems, but they are used to make decisions about future outcomes. Some of the many decisions financial models can help with are estimating a company’s projected growth, organizing its budget, choosing investments, deciding between acquisition or merger, and deciding which projects should be prioritized.

What Are the Most Challenging Parts of Learning Financial Modeling?

Although constructing a basic financial model in Excel is relatively straightforward, the conventions and formula logic needed to create a more complex model take time and practice. One of the most challenging aspects of learning to create financial models is to be aware of the numerous hidden assumptions at play, many of which may be hidden. Some assumptions are based on empirical values, which means they may not be completely accurate and could even be found to be untrue.

One example of a hidden assumption affecting financial models is the occurrence of subprime mortgages. At this time, financial models were based on the assumption that large numbers of people across the U.S. would not default on their loans at the same time. However, when the subprime mortgage did occur, home prices around the country dropped, and widespread defaults occurred. Because of their underlying assumption, the existing financial models couldn’t foresee this situation. This led to turmoil in the markets.

How Does Financial Modeling Compare to Other Fields?

The process of creating financial models is complex and challenging. It requires individuals to wear many hats and have a range of technical and mathematical skills, as well as soft skills such as decision-making, problem-solving, and attention to detail. For most people, it takes years to become skilled at building financial models. While reading equity research reports can help with this process, acquiring these skills is often accomplished through the learn-by-doing method. Financial modeling is considered a difficult task, even for those who work in the financial field.

On the other hand, accounting is a much easier skill to acquire. Accounting is the act of recording an organization’s various financial transactions. This process involves summarizing, analyzing, and reporting each transaction to entities such as tax collectors, regulators, and oversight agencies. The financial statements created by Accountants are typically a summary of any financial transactions that occurred during an accounting period. They’re designed to present an overview of the organization’s financial position, operation, and cash flow.

Learning accounting is considered to be an easier skill to acquire than financial modeling. Although Accountants must have skills such as proficiency with accounting software, understanding financial practices, and training with data analytics, it’s not much more challenging to learn accounting than studying any other popular field. On the other hand, Financial Modelers require significant technical training and real-world experience to create successful models.

Another field similar to financial modeling is investing. Investing is the act of purchasing assets that are expected to increase in value over time and will generate returns such as capital gains or income. This requires sacrificing some portion of your current assets, such as money, effort, or time. Although it takes time and requires developing a solid investment strategy and acquiring financial literacy, it’s not considered as difficult a skill to acquire as financial modeling. If you’re new to investing and want to learn how to get started, Noble Desktop’s free online class, Stock Market Investing Fundamentals, is a great way to master investment basics. This hour-long course covers topics like the risk-reward principle, capital gains tax, and some basics of valuation.

Why Learn Financial Modeling?

Financial modeling plays an essential role in helping organizations know how they are currently operating and forecasting future events. There are many benefits to learning how to create financial models. The following are just a few reasons why you should consider learning this skill:

• Financial modeling helps create accurate financial budgets. Because financial models work with a company’s data to create financial forecasts and budgets, they are generally accurate. A business can then use these forecasts and budgets to structure its activities. The closer an organization sticks to a budget, the better off it is likely to perform.

• It helps businesses grow. Financial models are valuable because they can suggest areas within an organization that could generate greater profits. These models also help an organization perform a cost-benefit analysis for any project.

• Financial models provide a detailed understanding of a business. Those who create financial models must deeply understand the business to generate a sound model. This requires knowing how the business operates and any factors that could impact its operations. Organizations that create financial models understand not only their business but also the factors currently affecting the business and external factors that may lead to uncertainty.

• It mitigates risk. One of the benefits of creating a financial model is that it can aid with a company’s due diligence process. A model outlines the financial impact of a given activity and, therefore, can help an organization minimize risk.

• Financial models create quick outputs. It can take business months to find answers to core financial questions or understand a specific decision’s impact. Financial models are advantageous because they can provide quicker results and be used for decision-making.

Common Types of Financial Models

The following are some of the most widely used types of financial models used by professionals such as Research Analysts and Investment Bankers, as well as those who work with private equity or corporate finance:

• Three-statement: This model is the most basic of the financial models. Three statements (balance sheet, cash flow, and income) are linked with Excel formulas to ensure that all accounts are connected. This allows a single set of assumptions to fuel the model.

• Discounted cash flow: This model takes the three-statement model further and values a company based on the net present value of its future cash flow. This model works with the cash flows from the three-statement model, adjusts as needed, and uses Excel’s XNPV function to provide discounted cash flows to today at the organization’s weighted average cost of capital.

• Option pricing: The binomial tree and Black-Scholes are two primary types of option pricing models. These models are based exclusively on formulas instead of subjective criteria.

• Forecasting: The forecasting model is used if a business wants to create a forecast that it can compare to its budget model.

• Consolidation: Consolidation models include more than one business unit in a single model. Each business unit is assigned its own tab and has a consolidation tab that sums up other business units.

• Budget: The budget model has a range of uses for financial planning and analysis tasks. It helps establish a budget an organization can use for the years ahead. These models are generally based on monthly or quarterly figures.

• Leveraged buyout: A leveraged buyout is one of the most intricate and challenging types of financial models to create. The various layers of financing can require cash flow waterfalls, as well as create circular references. This model is not common outside of investment banking or private equity transactions.

• Initial public offering: These models are created in Excel and are used to value a business before it goes public.

• Merger: The merger model is an advanced model with applications for evaluating Pro-forma dilution/accretion of an acquisition or merger. This model is often used in corporate development and investment banking.

Pre-built templates are available for many financial models. These templates can be used as a supplement to help you upskill your existing financial modeling skills or can be used on their own to create effective financial models.

Learn Financial Modeling with Hands-on Training at Noble Desktop

Noble Desktop offers several excellent learning options for those interested in studying financial modeling. Noble’s Financial Modeling Bootcamp covers the basics of accounting, finance, and corporate valuation. Those enrolled in this hands-on class work with Excel to create a discounted cash flow model. Students who don’t have a background in accounting or finance will be sent a short guide on terminology before class starts. All participants should have intermediate Excel proficiency as a prerequisite.

Noble’s Financial Analyst Training Program provides learners with instruction on pertinent corporate and financial concepts and how to create a full valuation model. This intensive program teaches core Excel skills, like how to work with PivotTables and shortcuts, as well as advanced Excel techniques, including cash flow projection tools and Goal Seek. All students will create an integrated, three-statement financial model based on current financial data.

Noble also offers financial modeling training courses in-person and live online. Those interested in learning more about how to use Excel for modeling can attend the Excel Bootcamp. In addition, FinTech courses such as Python for Data Science Bootcamp, Algorithmic Trading With Python, and FinTech Bootcamp are also available. Noble’s FinTech Bootcamp provides hands-on training from expert instructors in creating machine learning models, using programming languages like SQL and Python to analyze financial data, and working with various types of data, such as integers, strings, and floats. One-on-one mentoring and the option of a free course retake is included for all participants.