Excel as a Tool in Financial Modelling: Basic Excel in 

Brief

Financial modeling is one of the most highly valued, but thinly understood, skills in
finance.  The objective is to combine accounting, finance, and business metrics to create
an abstract representation of a company in Excel, forecasted into the future.  This guide
to financial modeling for beginners and “dummies” will teach you all the basics a
beginner needs to know!Forecasting a company’s operations into the future can be very
complex.  Each business is unique and requires a very specific set of assumptions and
calculations.  Excel is used because it is the most flexible and customizable tool
available. Software, as an alternative, can be too rigid and doesn’t let you understand
each line of the business the way Excel does.

Example of Financial modeling In Excel for dummies one of the most multipurpose and
hot finance skills in today’s scenario. Financial models play a vital role in most major
business decisions. Generally, the financial model is prepared whenever any company is
planning to expand their business, evaluating particular project (also called project
finance modeling), Merger or acquisition of particular (target) company and future
forecasting of financials. For startup companies, the preparation of financial Model is
important for further business planning and for big organizations Financial Modeling In
Excel plays an important role in long-term planning, expansion, development, cost
planning etc. Commonly financial models are prepared in excel spreadsheets.

Example of Financial modeling In Excel

So, let’s understand what is meant by financial Modeling In Excel? In simple words,
financial modeling is the process of systematic forecasting of company financials. A
financial model is prepared by financial analysts, investment bankers, equity research
analyst and other finance professionals.

There is some basic financial modeling In Excel term that you need to understand.

 Forecasting: Forecasting means Company’s expected financial position in the

future.
 Assumptions: To build a financial model you need to make some Hypothetical
assumptions. Now, what does it means? Assumptions are used to present a condition
that is not necessarily expected to occur but is consistent with the purpose of the
projection.
 Financial statement Analysis: Financial Analysis means analysis of financial
statements like income statement, Balance sheet, Cash Flow Statement using various
techniques.
 In this financial modeling for beginners and “dummies” guide, we have laid out the basic
steps of how to build a financial model.

1. Historical data

Input at least 3 years of historical financial information for the business.

2. Ratios & metrics

Calculate the historical ratios/metrics for the business such as margins, growth rates,
asset turnover, inventory changes, etc.

3. Assumptions

Continue building the ratios and metrics into the future by making assumptions about
what future margins, growth rates, asset turnover, and inventory changes will be going
forward.

4. Forecast

Forecast the income statement, balance sheet, and cash flow statement into the future
by reversing all the calculations you used to calculate historical ratios & metrics.  In other
words, use the assumptions you made to fill in the financial statements.

5. Valuation
After the forecast is built, the company can be valued using the Discounted Cash Flow
(DCF) analysis method. Learn more about DCF models and valuation.

CONDITIONAL FORMATTING

Conditional formatting is useful for highlighting certain results in an Excel financial

model.  For example, breaches in financial ratios or bank covenants.  If a financial ratio
in the model is breached, then Excel formatting automatically changes so that the key
result is highlighted in a bright colour.  The instructions below will get you started if you
have one of the later versions of Excel (2007 and beyond).

An example: conditional formatting in Excel

In this example we’re going to modify our nested If function example, imagining that if a
key financial ratio (e.g. Debt: EBITDA) is > 3.0, then a bank covenant is breached, and
we want the result at cell B7 highlighted in red.
Accessing and creating conditional formatting in your financial model

From the “Home” tab, under “Styles” select “Conditional Formatting”.  To get yourself
started, select “New Rule”, and the “New Formatting Rule” box pops up.  Select the
second item: “Format only cells that contain”.

Financial modelling & conditional formatting: setting the condition

Next set the condition that triggers the covenant breach.  Under the “Format only cells
with” section, select “Cell Value” “equal to”.  In the next box type this text: =”Code Red”.

Conditional formatting: set the format

Next, set the format that applies should the breach occur.  Towards the bottom of the
“New Formatting Rule” box, click on the “Format” button.  Should the breach occur,
we’re going to highlight the background of the result cell bright red, with bold white text.  
After you have clicked on the “Format” button, on the “Fill” tab, select the colour red.  On
the “Font” tab, select a white and bold font.  Click on “OK”.  The format you have
selected is now previewed in the bottom of the “New Formatting Rule” box.  Click on
“OK”.
 Type a high value (e.g. 3.5) into cell B5, and formatting appears red. Type a low value
(e.g. 1.0) into the cell.  The condition is no longer triggered, and the red formatting
disappears.

Financial modelling course tips for conditional formatting

Here are our tips for conditional formatting:

 Use bright solid colours and white bold text. This will ensure that the formatting is
as obvious and visible as possible.
 Get key breach or error results returning text messages e.g. “breach” or “error” or
“code red” in a line in the financial model, so that they are completely obvious, including
when the Excel spreadsheet is printed out in black and white.

 Build your logic into the spreadsheet where it is visible (= the If formula in cell B7
in our example), with the key inputs changeable (cells B3 and B4). The alternative is to
‘hide’ the logic in the background of the conditional formatting (you can build
conditionality in where it says “Format only cells with:”). The first alternative makes your
logic more clearly visible and easier to modify.