If you’re exploring a career in finance, you’ve probably come across the term financial modeling. Financial modeling is the process of using financial data, business information, and projections to create a picture of what could happen to a business in the future, financially speaking.
The Association for Financial Professionals notes that financial models can support business strategy, decision-making, risk analysis, valuation, planning, budgeting, and scenario testing.
Financial modeling is used across industries such as investment banking, asset management, corporate finance, and equity research. So, this isn’t a skill limited to one type of finance job.
If you’re considering financial modeling as a career, it helps to understand what the work involves and where it can take you.
Key Takeaways
- Financial modeling combines historical data and assumptions to forecast business outcomes in spreadsheet tools.
- Models support valuation, budgeting, M&A analysis, and strategic decisions across finance roles.
- Strong modelers blend accounting knowledge, Excel skills, and industry-specific assumptions.
- Learning paths range from self-study courses to on-the-job practice with mentor feedback.
- Financial modeling skills transfer across investment banking, FP&A, and corporate finance careers.
What Is Financial Modeling?
At its simplest, financial modeling is building a tangible representation of a company’s finances. A financial model often combines historical financial information to create future projections like profits, expenditures, and revenue.
Think of it like a business forecast with a lot more moving parts. For example, the leaders of a company may want to know what could happen if they open new stores. A model can help show them how that decision might affect revenue, costs, cash flow, and other financial results.
Many financial models connect three major financial statements:
- Income statement
- Balance sheet
- Cash flow statement
This is often called a three-statement model. More advanced models can also be used for tasks such as company valuation, mergers & acquisitions, and leveraged buyouts. For example:
- Discounted Cash Flow (DCF): Values a company or asset based on the present value of projected future cash flows.
- Leveraged Buyout (LBO): Analyzes the financial returns and complex debt schedules involved in acquiring a company using mostly debt.
- Mergers and Acquisitions (M&A): Assesses how combining two corporate entities impacts earnings per share and overall valuation.
- Comparable Company Analysis (CCA): Estimates a target company’s worth by comparing its financial metrics and market multiples with other comparable companies. Also known as “trading comps.”
The goal isn’t simply to make a giant spreadsheet. It’s to create something that helps people understand a business and make informed choices.
What Is Financial Modeling Used For?
Financial models are used to help businesses and professionals weigh different choices based on the projected outcomes. However, the projected outcomes vary per type of financial model.
Common financial model formats and their uses include:
- Forecasting: Estimating future financial performance.
- Raising capital: Figuring out debt and equity.
- Budgeting: Planning future income and spending.
- Valuation: Estimating the value of a business or investment.
- Investment analysis: Studying potential investments.
- Business growth: Buying more stores or entering new markets.
- Selling assets: Divesting assets like real estate, vehicles, or infrastructure.
- Acquisitions: Looking at the financial impact of buying a business or asset.
- Capital planning: Examining decisions about raising or using capital.
- Scenario analysis: Testing how different projections could change results.
For example, imagine a pizza shop wants to open a second location. Instead of simply asking, “Can we afford it?”, they create a model. The financial model helps them examine expected sales, costs, investment needs, and possible results.
That’s the real value of modeling: it helps turn a business question into numbers you can analyze and use to make informed decisions.
What Does a Financial Modeler Do?
Basically, a financial modeler inputs financial data into cells in Excel or other spreadsheet software. However, the data they input and the formulas they create depend on the purpose of the model.
If you are weighing finance career paths, our CPA vs financial advisor comparison compares two common directions.
For example, if they are looking to estimate sales growth, they might put last year’s sales in Cell A and this year’s sales in Cell B. Then, estimate next year’s revenue growth in Cell C based on the difference between these two numbers.
Just like there’s no singular formula, there’s also no single job title applicable for everyone who builds financial models. Instead, financial modeling is a skill used in several finance careers.
You may use financial modeling as a:
- Financial analyst
- Accountant
- Investment banking analyst
- Banker
- Equity research analyst
- Private equity professional
- Real estate investor
- Financial Planning & Analysis (FP&A) analyst
- Corporate finance professional
- Corporate development professional
The type of modeling you do depends on your job. An investment banking analyst may work on models for mergers and acquisitions. Someone in FP&A may focus more on budgets, forecasts, and business performance. A banker may look at credit and debt.
That’s one reason financial modeling can be useful. It can support more than one finance career or industry.
What Skills Do You Need for Financial Modeling?
You don’t need to know everything about finance before you start learning financial modeling. However, some skills will make the process much easier.
Accounting
Having a solid understanding of accounting fundamentals is recommended for financial modeling. You should understand the main financial statements and how they connect.
Excel
Excel is a common tool used for financial modeling. To start, you should understand basic formulas, functions, formatting, and how to organize a spreadsheet.
Don’t worry if your current Excel skills aren’t amazing, though. You can build them as you learn.
Financial analysis
You also need to understand what the numbers mean. A model isn’t very useful if you can build it but can’t explain the results.
Business knowledge
Financial models are based on how businesses actually work. Understanding sales, costs, growth, cash flow, and other business drivers can help you build better models.
Attention to detail
A small mistake in a spreadsheet can mess up other calculations. Careful checking of the numbers is an important part of the work. That said, financial models may be sent to a validator for final checks. They independently vet the model to ensure there are no mistakes.
How Do You Learn Financial Modeling?
The best way to learn financial modeling is to combine study with practice.
You can learn by doing, including working with historical financial information to build your own models that project future results. However, professionals can also take courses and exams to learn and become a certified financial modeler.
A simple financial modeling learning path could look like this:
- Learn accounting basics: Start with the income statement, balance sheet, and cash flow statement. Then, move on from there.
- Build your Excel skills: Learn common formulas and functions. Then practice organizing financial information in a clear spreadsheet.
- Learn basic financial modeling: Start with simple forecasts. Don’t try to build the world’s most complicated spreadsheet on your first weekend.
- Build a three-statement model: A three-statement model is a good place to start. Practice connecting an income statement, balance sheet, and cash flow statement.
- Learn valuation: Once you’re comfortable with the basics, you can move into topics such as discounted cash flow analysis (DCF), leveraged buyout (LBO), and mergers & acquisitions (M & A).
- Practice with real companies: Working with real financial information can help you understand how models are built and used.
- Consider a financial modeling course: A structured course will guide you, giving you lessons, exercises, and a clear learning path. It can be helpful if you prefer guided learning rather than piecing everything together yourself. You may also earn a certification that can help you get a job or a better job as a financial modeler.
Is Financial Modeling a Good Career Skill?
Financial modeling is a very useful skill if you’re interested in or involved in finance, numbers, and business decisions.
Securities roles often use models too — see our Series 7 license salary guide for compensation context in that track.
Financial modeling applies to several areas of finance, including investment banking, equity research, corporate finance, private equity, and financial planning and analysis (FP&A). It also brings several skills together. You’ll work with accounting, Excel, financial analysis, and business information to create reliable financial models.
But it’s important to keep your expectations realistic. Learning financial modeling doesn’t automatically guarantee a finance job. Employers may also look for financial modeling education and experience, as well as communication and other relevant skills based on the role.
I’d think of financial modeling as one part of your finance toolkit rather than a magic shortcut into the industry.
Should You Learn Financial Modeling?
If you’re interested in forecasting, company valuation, investments, or business planning, financial modeling may be worth learning.
You don’t need to start with the hardest model you can find. Begin with accounting and Excel. Then learn basic modeling and practice with real financial information.
As your skills improve, you can explore areas that interest you most. Maybe you’ll enjoy valuation. Perhaps FP&A is a better fit. Or you may discover that investment banking is where you want to focus.
The important thing is to build practical skills instead of only memorizing definitions.
Final Thoughts
Financial modeling uses financial information and projections to help you understand what could happen. You can use it for forecasting, budgeting, valuation, investment analysis, and many other financial business decisions.
If you’re considering financial modeling as a career skill, start with the basics. Learn accounting, improve your Excel skills, and practice building simple models. Then work your way toward other advanced techniques.
You don’t have to become an Excel expert overnight. Take it one step at a time, focus on understanding the numbers, and build models that answer real business questions.
FAQs
What is financial modeling in simple terms?
Financial modeling is the process of using financial information and projections to create a model of a company’s expected financial performance. It can help professionals and business leaders analyze options and make astute business decisions.
Is financial modeling hard to learn?
Financial modeling takes practice, but you can learn it step by step. A good starting point is accounting basics, followed by Excel and basic financial modeling.
Do I need accounting knowledge for financial modeling?
Yes. A basic understanding of accounting is important because financial models often use financial statements, connecting their numbers and financial data. Financial modelers should also have mathematical proficiency and attention to detail.
Is Excel used for financial modeling?
Yes. Excel is a common tool used for financial modeling. Financial models often combine financial statements, projections, and forecasts in an Excel spreadsheet. Excel’s tools can then be used to create mathematical formulas that calculate projections.
What careers use financial modeling?
Financial modeling is used in many careers and industries, such as analysis, investment, banking, equity research, corporate finance, real estate, financial planning, oil & gas, and more.
