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About this lesson
Quick review on the essential skills and topics brought up in the Financial Modeling Basics course.
Exercise files
There are no related exercise files for this lesson.
Quick reference
Overview
An overview on the application of Financial Modeling Techniques.
When to use
To refer to when building a financial model.
Instructions
- Models should adhere to the following four key qualities:
- Consistency
- Robustness
- Flexibility
- Transparency
- Key Concepts in Financial Statement theory:
- Financial statements theory
- Financial statement types
- Meaning of “three-way integrated”
- Linking the statements
- Construct the basic model first
- Financial statements modelling
- How do you eat an elephant?
- Getting the order right
- Importance of checks
- Part by part – only ever one mistake away
- Financial statements theory
- 00:04 Welcome to the Financial Modeling Techniques course.
- 00:07 This course builds on the Basics course, which was the preparation.
- 00:12 In that we looked at the four key principles of a best practice model.
- 00:17 And we looked at Excel's key functions and
- 00:19 features required to build a financial model.
- 00:21 Well lets put all that together now to put together a walk through of an elementary
- 00:25 financial model.
- 00:26 And this means that this course built on a basics course
- 00:29 which is now assumed knowledge.
- 00:32 Like the first course, there are these examples throughout,
- 00:34 although we will have some Powerpoint slides to begin with.
- 00:38 And yet again,
- 00:38 all I can stress is please enjoy, it is meant to be a bit of fun at the same time.
- 00:43 Just as a refresher then, I'm going to focus for
- 00:46 a moment on the key concepts in financial modeling, because we're going to be
- 00:49 coming back to these again and again, and again, in this course.
- 00:52 We're going to look at the principles of CRaFT, C-R-F-T, consistency,
- 00:57 robustness, flexibility, and transparency.
- 01:01 The model should just have one formula copied across, it should be that the dates
- 01:05 are all of equal periodicity and start and end in the same column.
- 01:08 They should all have the same look and feel so
- 01:10 that various items like inputs, calculations, outputs were all formatted or styled consistently.
- 01:16 The models should be robust,
- 01:17 there shouldn't be any prima facie errors in there, #ref #div/0, #null, #brown.
- 01:23 I made that joke last time out. The balance sheet should balance.
- 01:26 The cash in the cash flow statement should equal the cash from the balance
- 01:29 sheet, etc.
- 01:30 It should be flexible so
- 01:31 that we can actually change the inputs within agreed parameters.
- 01:35 We can't just put anything in any old model, we can't just for
- 01:38 instance say economic life will be dog.
- 01:40 We are actually looking at putting a number in that, but
- 01:43 if it's within an agreed parameter, then the model should work accordingly.
- 01:46 And it should be transparent too,
- 01:48 so that people can actually follow a model on a piece of paper.
- 01:51 That's a key test of a good financial model,
- 01:54 because the key decision makers tend not to be looking in the Excel formula bar
- 01:59 report or part of a Power Point something like that.
- 02:02 So with that in mind, a financial model should be stream lined, it should get you from A,
- 02:07 where you are now to B, what you want to do or what decision you need to make and
- 02:12 how do you evaluate quantitatively and qualitatively too.
- 02:16 That means in the first graphic, the top one,
- 02:19 A to B should be pretty much a straight line.
- 02:22 The problem is too many financial models out there are tangled up,
- 02:24 they sort of follow a rather circuitous route, and noone can actually make head or
- 02:28 tail of what on Earth they're supposed to be doing.
- 02:31 Don't make a model over-elaborate, don't keep building it till it's gone so
- 02:36 far from its original purpose it's unrecognizable.
- 02:39 Keep it simple, stupid, short and to the point.
- 02:41 Some of the best models I know are not only my best friends, but also very,
- 02:46 very small and very easy to work with.
- 02:50 So really, what are we going to do in this course?
- 02:52 What are the key points?
- 02:53 This financial statement theory, first of all, is not assumed knowledge.
- 02:57 I know you're not all chartered accountants out there, and some of you may only have
- 03:00 basic or rudimentary understandings of the financial statement types.
- 03:03 There's three and we'll go through each of them individually.
- 03:06 We'll look at the meaning of what three way integrated is and
- 03:09 realize it's not as kinky as it sounds.
- 03:11 And we'll also look at how we would actually link the financial statements,
- 03:14 and to do that we'll look at constructing a basic model in the first instance.
- 03:18 If we are going to do financial statement modeling
- 03:21 then it can be a bit of an overwhelming experience for the uninitiated.
- 03:25 And typically the people who are asked to build a financial model get no training in
- 03:28 the first place, so you're luckier than them.
- 03:30 I'm actually gonna show you how to do it.
- 03:33 We're gonna talk through some of the key learnings so
- 03:35 it becomes rather obvious the order you do it in.
- 03:37 Because no matter what model I build,
- 03:39 it'll never be the model you're going to build.
- 03:42 Right well, we need to cut it up piece meal and
- 03:44 that's the whole idea of whole idea of how do you eat an elephant.
- 03:46 One piece at a time.
- 03:48 It's important to get the order right,
- 03:50 it's important to build the checks at the beginning, and you just go part by part,
- 03:53 eradicating any mistakes along the way.
- 03:56 So if you're all sitting comfortably, let's begin.
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