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Financial modeling is truly an art form. Great writers draw on a broad vocabulary to find the right word to communicate their ideas. A good financial modeler should be proficient in using a variety of functions so that he or she can closely mirror the behavior of a company’s financial statements in a financial model. Let’s take a look at a few functions that every financial modeler should know.

The vast majority of financial modeling can be done with your basic arithmetic operators (+ – x /), but there is also a significant amount of business logic that cannot be easily illustrated without incorporating other functions.

The IF function

Let’s say, for example, that we’ve modeled out an income statement, but we want to add a dividend payment. If we don’t have enough net income available to pay out a dividend (and don’t want to draw funds from our retained earnings), we don’t want to pay a dividend. If we do have enough net income on hand, we would like to pay a .10 per share dividend to investors.

This is a perfect place to use Excel’s IF function. The IF function evaluates a certain condition and returns one value if the condition is true and another value if the condition is false. In our case, the function would read as follows:

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Company financial health refers to the current stability of a business’s finances. Regular financial checkups can help business owners spot and remedy weaknesses in their financial management to avoid unwanted losses.

A company’s financial health is analyzed by examining its financial statements for a given period of time, usually at the end of the fiscal year. When analyzing financial health, business owners take into account profitability, liquidity, debt, and equity. This information is found in the Income Statement, the Balance Sheet, and the Statement of Cash Flow. Read the rest of this entry »

The Wealth Formula succinctly depicts the components that are necessary for you to create real wealth. The Wealth Formula is shown below:

M+K+P+A=W

It identifies four essential wealth creation stages and the relationship between them. These are:

Wealth Mindset
Wealth Knowledge
Wealth Planning
Wealth Action

It links each of these four component through the plus sign, +, which signifies that each of the four components are necessary for you to create wealth. In other words, missing one or more of the four wealth components will dramatically impact your ability to generate wealth.

For example, you could mentally prepare yourself, learn everything you need to make enormous wealth and create the most detailed plan to achieve your desired level of wealth, but if you don’t action it then all that preparation is worthless.

Similarly, if you mentally prepare yourself, learn everything you need to make enormous wealth and run off actioning your newfound mindset and knowledge but fail to make a plan it is like setting off in your car to go somewhere you’ve never been without taking a map. What’s your wealth destination? How will you know if you’ve achieved what you wanted to achieve? How do you know your using the right investment vehicle? How do you know if you’re on track or not to reach your target? Are you surpassing or underachieving against realistic milestones? All of these questions would be easily answered with proper planning. Read the rest of this entry »

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Financial Modeling: Murder by Numbers
By John Siegler

To borrow a line from the Police, it might seem as easy as your a-b-c’s, but there’s a lot that goes into effective financial modeling.

For my entire career, financial modelling has always been central to the analysis I’ve relied upon to evaluate a business’ health or justify an investment in its growth.

There are several important steps to follow in developing a financial model which will serve your objectives as an entrepreneur, whether you’re trying to manage what you have or raise capital for what you could. This is particularly true for newer enterprises, as the discipline associated with identifying and thinking through the key business drivers is invaluable to the early planning process. Read the rest of this entry »

Accounting is considered to be one of those complicated yet necessary chores that keep people’s financial affairs relatively clean. For the beginner who is just getting started, the process may not be the first obstacle. Often, it is understanding the special language used by accountants and those that work around them. In other words, one must wade through the jargon in order to understand what’s going on. The first step in gaining understanding of accounting is to break concepts down to one fundamental point: financial statements. Read the rest of this entry »