Top 5 Myth's associated with Learning Financial Modelling skill
By Amit Kumar Nahata
The growth of the Indian economy has facilitated the prosperity of the Financial Services (FS) industry. Anyone who is looking for a rewarding career in the FS industry, need to master the Financial Modelling skill. Despite this known fact, during my various interactions with learners from various age groups, diverse backgrounds, I see a hesitancy in adopting this skill.
This hesitancy stems from the various myths which they have created around this skill. While I do not consider myself as myth buster, the idea of this blog is to create awareness about the skill which in turn will clear some of the myths associated with Financial Modelling.
Let me begin by quoting the popular definition of Financial Modelling “It is the activity of creating an abstract representation that is, model, of an actual financial situation. Put in simple words, there is real life situation at hand and you want to represent that through the use of excel spearedsheets for decision making purposes. Say for instance you want to buy a house on EMI, now the decision which you need to make is whether you should go for a 10 Year EMI or a 20 Year EMI or a 30 year EMI. Additional complexities can be in the form of Fixed Rate of Interest or Floating rate of Interest. A classic real life financial situation faced every day, all you need to do is build a simple Financial model using Scenario Analysis and the decision making process becomes easy.
While the previous example was a simple application of Financial Modelling, there are various uses of building financial models, the irony is that there is subjectivity in understanding the meaning of Fin & application of Financial Modelling leading to various notions/myth’s pertaining to the skill.
Myth 1: I do not know Excel well, so I would not be able to learn Financial Modelling
This is perhaps the most common statement which I hear from learners. While the knowledge of Excel is required to build models, but it is not heavily dependent on your proficiency in Excel. It is just a tool to manifest the financial situation and a basic working knowledge of Excel will be a good starting point to learn & build Financial Models. As you go deeper in the modelling skill you can augment your excel skills to create sophisticated Financial Models.
Myth 2: Financial Modelling is all about valuation
While Valuation is a core activity associated with Financial Modelling, trust me it is not the only purpose of Financial Modelling or learning this skill. Financial Modelling as a skill has far broader learning outcomes like: Analysing companies to understand their financial health, Projecting Financial Statements in future to view trends, Visualize Financial Data through models & associated charts etc. In addition to Valuation and the by-products of Valuation, this skill also helps in analysing M&A transactions, IPO Analysis, evaluating Project Finance Transactions etc. So all in all this is not about Valuation only.
Myth 3: I cannot find a job profile with Financial Modelling keyword, so how will it help me?
Financial Modelling is a key skill with application in several areas within banking and finance industry as well as within corporations. It prepares you for roles in core – finance areas such as:
So Job profiles like Financial Analyst, Financial Manager, Research Analyst, Equity Research associate etc. all these profiles have Financial Modelling as key application.
Myth 4: Only CFA’s and MBA’s should learn Financial Modelling
This is perhaps the most widely held misconception among students since our standard curriculum does not expose BCOM, BBA, BMS guys to these terminologies itself. Forget about teaching these concepts in our regular courses these courses do not even mention about the Financial modelling skill and hence this ignorance stems from this fact. Hence it becomes even more imperative for graduate students to master this Financial Modelling skill and be differentiated from the rest.
Myth 5: I’m a CA and I know Financial Statements, so why should I learn Financial Modelling?
While Chartered Accountants (CA’s) are considered experts in the domain of accounting, taxation, audit etc. the skill of Financial Modelling goes beyond the conventional accounting of preparing Financial Statements. It has deeper intervention in Company Valuations, Project Finance Modelling, Real Estate & Bank Modelling, and M&A Analysis etc. So it is a value add for hard core accounting professionals as well.
I will end this blog with a story of doctor who enrolled for Financial Modelling, before speaking with him I was wondering what his motivation for doing this program, but after I spoke with him I was convinced that he had made the right choice. Apparently he was running his own hospital and was doubling up as a doctor and as an entrepreneur (businessman) and like any other business guy he wanted to check the Financial Health of his enterprise. How was his vision of running his own hospital shaping up, what the future will be considering the current situation, all these questions were running in his mind and he wanted someone to help him with that? When I explained him the learning outcomes associated with this skill he was keen to do it himself, yes it was challenging, because he has to learn something very different from his area of expertise, but he somehow did it.
And is the crux of this blog that Financial Modelling is a relevant skill across age groups, across qualifications across job profiles.