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. 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 what it is they must model. If they are confident that they understand how an area of the business works, they may press on and open up Excel. 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 do understand the business situation, or by creating flow diagrams that set out the commercial and financial ingredients of the business.
It is helpful to start with 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.Download the full Business Analysis Lifecycle ebook here