Financial modeling is one of the most highly valued, but thinly understood, skills in financial

analysis. The objective of financial modeling is to combine accounting, finance, and business
metrics to create a forecast of a company’s future results.

A financial model is simply a spreadsheet which is usually built in Microsoft Excel, that
forecasts a business’s financial performance into the future. The forecast is typically based on
the company’s historical performance and assumptions about the future, and requires
preparing an income statement, balance sheet, cash flow statement, and supporting schedules
(known as a three-statement model).

From there, more advanced types of models can be built such as discounted cash flow
analysis (DCF model), leveraged buyout (LBO), mergers and acquisitions (M&A), and
sensitivity analysis. Below is an example of financial modeling in Excel:

There are many types of financial models with a wide range of uses. The output of a financial
model is used for decision-making and performing financial analysis, whether inside or
outside of the company. Financial models are used to make decisions about:

 Raising capital (debt and/or equity)

 Making acquisitions (businesses and/or assets)
 Growing the business organically (e.g., opening new stores, entering new markets,
etc.)
 Selling or divesting assets and business units
 Budgeting and forecasting (planning for the years ahead)
 Capital allocation (priority of which projects to invest in)
 Valuing a business
 Financial statement analysis/ratio analysis
 Management accounting
Financial modeling is the process of estimating a project or business’s financial performance
by considering all relevant factors, growth and risk assumptions clearly understand the
impact. It enables the user to clearly understand all the variables involved in financial
forecasting. It is also important to remember that the results’ accuracy heavily relies on the
assumptions and inputs.

Various financial modeling examples are different in type and complexity as the situation
demands. They are widely used for valuation, sensitivity analysis, and comparative analysis.
There are other uses, like risk prediction, pricing strategy, effects of synergies, etc. Different
examples cater to their own set of specialties, requirements, and users.
Following are some of the examples that are widely used in the Finance Industry:
You can see below various Schedules / Modules –

 The core modules are the Income Statement, Balance Sheet, and Cash Flows.
 The additional modules are the depreciation schedule, working capital schedule,
intangibles schedule, shareholder’s equity schedule, other long-term items
schedule, debt schedule, etc.
 The different schedules are linked to the core statements upon their completion.

Full-Scale Modeling is a lengthy and complicated process and hence disastrous to go wrong.
It is advisable to follow a planned path while working on a financial model to maintain
accuracy and avoid getting confused and lost. Following are the logical steps to follow:

 A quick review of Company Financial Statements: A short review of the company

financial statements (10K, 10Q, Annual reports, etc.) will give the analyst an
overview of the company, as in, the industry of the company, segments, history of the
 company, revenue drivers, capital structure, etc. This helps plan the layout of financial
Modeling by setting a guide path, which can be referred to from time to time as we
progress.
 Historical Numbers: Once a fair idea is generated about the company and the types
of financial models to be prepared, it is advisable to start with inputting Historical
data. Past Financial Statements of the company can be found on the company
website. Data from as long as the conception of the company is available. Usually, the
past three years data is added to the historical side, called actual numbers. Color code
the cells so that historical and formulas can be quickly identified separately.
 Ratios and Growth rates: Once the historical numbers are added, the analyst can
calculate the required Financial ratios (Gross Profit Ratio, Net Profit Ratio, etc.) and
growth rates (YoY, QoQ, etc.). These ratios help in identifying a trend for high level
strategizing and also forecasting.
 Forecasting: The next step after historical and ratios is implementing projections and
forecasting. It is usually done for 3 to 5 years. Line items like Revenue are generally
projected on Growth rates. Whereas cost items likeCOGS, R&D, Selling General &
Admin exp. Etc. are projected on the base of revenue margin (% of sales). The analyst
should be careful while making the assumptions and should consider the trends of the
market.
 Interlinking of Statements: For the Model to reflect the flow from one statement to
another, they must be linked together dynamically and accurately. If done correctly,
the Model should balance out all the words, thus giving it a finalized outlook.

Types of Financial Models

 3-Statement Model

The 3-Statement Model involves projecting a company’s income statement, balance

sheet, and cash flow statement to understand its financial performance.

 DCF Model

The DCF Model looks at a company’s or investment opportunity’s value by

estimating how much money it will make and then figuring out how much it is worth

today.

 IPO Model

The IPO Model helps determine the price at which a company will sell its shares

when it first goes public on a stock exchange.

 Mergers & Acquisitions Model

The Mergers & Acquisitions Model helps understand the financial impact of

combining two companies and how much the new company is worth.
 Private Equity Model

Private Equity firms use the Private Equity Model to decide if they should invest in a

company and how to make that investment successful.

 Leveraged Buyout Model

The Leveraged Buyout Model helps determine how much money investors can make

if they borrow money to buy a company and then sell it later at a higher price.

 The Sum of Parts Model

The Sum of Parts Model involves looking at different parts of a company and figuring

out how much each is worth separately. Then, you add all the values to see how much

the entire company is worth.

 Options Pricing Model

The Options Pricing Model helps people determine how much money they can make

by buying and selling options contracts.

 We will input all the essential financial data from Apple’s 10K report (from Statement

of Profit and loss, Balance Sheet, and Cash Flow Statement) into an Excel

spreadsheet.

 If you look at Apple’s 10K report for the year 2022, you will see that it provides

financial data for 2020, 2021, and 2022.

 But we recommend getting data for the last five years to understand how the company

is doing. It will help us make better projections about where the company is heading.

 So, download Apple’s annual reports from the past 2-3 years and fill in the Excel

spreadsheet with all the historical financial data.

We have already done this for you. We have populated three years of historical data of Apple

Inc. in the Income Statement tab, Balance Sheet tab, and Cash Flow Statement tab of an

Excel sheet (Without Solution Template).

Step 4: Perform Ratio Analysis

Before we start with the forecasting process, we will conduct a thorough ratio analysis. In

ratio analysis, we will compare historical numbers related to Apple’s business by dividing

one number by another. It will help us understand if the company is performing well and use

the results to make decisions.

Also, we have a detailed article called “Ratio Analysis Types” that talks about 24 different

kinds of ratios and even gives you free Excel templates to practice with! Thus, if you want to

know more about each type of ratio that we will use for financial modeling in Excel, please

check out that article.

So, let’s start by analyzing some crucial ratios of Apple Inc.

Horizontal and Vertical Ratio Analysis:

Horizontal ratio analysis is when we compare the financial data of a company over multiple

financial years to understand its trends and changes in performance. It helps us know how the

company is performing over time.

Vertical ratio analysis compares the different line items on a company’s financial

statement for one accounting period. For example, if we divide the current assets

and current liabilities of Apple Inc. for the year 2022, it is a vertical ratio analysis. We use

this to identify their relationship, importance, resource allocation, etc.

We will be using vertical ratio analysis to create Apple’s financial model.

Calculate the Liquidity Ratios of Apple:
Liquidity ratios show if a company has enough money to pay what it owes (debts and

liabilities) in the short term (less than 12 months). A higher liquidity ratio means that the

company has more than enough financial reserves and can easily cover what it owes.

Here are the most common liquidity ratios:

 Current Ratio = Current Assets / Current Liabilities

 Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts

Receivables) / Current Liabilities

 Cash Ratio = Cash & Cash Equivalents / Current Liabilities

Calculate the Efficiency Ratios of Apple:

We calculate efficiency ratios to determine how effectively a business uses its available

resources or turns its inventories into cash. We can also call them turnover ratios.

The most common efficiency ratios are:

 Receivables Turnover Ratio = Sales / Accounts Receivable

 Inventory Turnover Ratio = COGS / Average Inventories

 Payable Turnover Ratio = COGS / Accounts Payable

 Asset Turnover Ratio = Sales / Total Assets

 Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets

 Equity Turnover Ratio = Sales / Total Equity