Fancy yourself a storyteller? Financial modelling is the numerical way to tell a story and transform simple digits into insights and predictions. For example, you have a business idea but you need to convince potential investors or directors that your plan will succeed - this is where financial modelling comes in.
What is financial modelling?
Financial modelling is the art of creating mathematical representations, or models, to predict a company’s financial performance. These models serve as a roadmap which guides decision-makers through the web of possibilities and helps them to make informed choices.
But it’s not all about numbers and equations. Financial modelling can be quite an exciting adventure - blending creativity and analysis to tell a (hopefully happy) story.
How does financial modelling work?
Gathering data
To tell a good story, you need to know where it’ll start. This is where the first step of financial modelling comes in.
Any good financial model requires the initial step of collecting the relevant historical data. This includes expenses, revenue, and market trends that will act as the foundation on which the model will be built.
Setting assumptions
Of course, you can’t change the real data to fit with your preferred conclusion. But where do you expect your story to go?
Every financial model relies on certain assumptions about the future. So, think of this as your story plot: what is going to happen? With careful research and industry knowledge, you can determine factors such as growth rates, market share projections, and pricing strategies.
Constructing formulas
You have your starting point, and where you expect the story to go - so now plot your story!
Using existing data and assumptions, you can build the formulas and equations that will calculate future financial outcomes. Your ‘characters’ can include revenue forecasts, cost projections, cash flow analysis and more.
Sensitivity analysis
Financial modelling allows you to best test different scenarios by tweaking the assumptions. A good story isn’t always predictable, so it’s important to explore other endings just in case.
Considering other possible assumptions will empower you to make adjustments or explore alternative strategies, which will help you understand the impact of various factors on the business’s bottom line.
Presenting insights
What helps to tell an engaging story? Illustrations!
Once your financial model is complete, you can visualise the data using graphs, charts or dashboards which will transform a sea of numbers into a story of trends and patterns. And the most important thing is that it’s easier to understand.
Practice makes perfect
Most seasoned writers will tell you that their first few stories didn’t always go to plan. Like any craft, financial modelling requires honing your skills and refining your approach. The more experienced you become, the more skilled you’ll be. So, embrace the learning curve, experiment, and don’t be afraid to ask for guidance along the way.
Who is financial modelling for?
Financial modelling isn’t just for financial analysts or CFOs. It can be a powerful tool for entrepreneurs, managers, or just individuals aiming to make informed financial decisions. The skills that you gain from financial modelling are always going to be useful - so dive into the world of numbers and data and watch your ability to make positive financial predictions flourish.
The story goes on…
If you’re looking to upskill in financial modelling and use data and numbers to become a great storyteller, consider becoming a Chartered Financial Analyst with the CFA qualification.
If you’re still not sure whether this is right for you, try our free seven day CFA Distance Learning trial.
If you’re an employer looking to upskill your team in financial modelling, and equip them with the skills needed to excel, enquire about our in-house or online training courses in Microsoft Excel for Financial Modelling.