Mayur, Nitin and Pooja were sitting in the college canteen and discussing their future career plans. Mayur remarked, “Hey! It is a good idea to study financial modeling. The course is a 3-month course and the course matter covered is good. My only concern is what job roles will be opened up after I complete the course.”
Nitin added “I was also worried about the same. Hence I spoke to my uncle who is a senior manager in a Public Sector Bank. After talking to him, I realized that there are numerous profiles to which I can apply once I am an expert in financial modeling”. “Please enlighten us poor souls too”, Pooja said in jest.
“Financial modeling allows you to create a model that helps you in decision making. For example you are representing a road construction company and want to bid for a toll road project. The key decisions include what price to bid for the project, what toll to charge for the vehicles, what returns will be accrued from the project and over what time frame. All these questions can be answered and robustly tested with different scenarios if a financial model is prepared.”
“Financial modeling expertise is useful for different profiles across numerous domains. In the investment banking industry, this skill is useful for roles in mergers and acquisitions, Initial Public Offering analysis etc. Here the primary requirement is model-building for the companies by analyzing the target company valuation and benefits of potential combination with other companies. “
(Refer to Financial Modeling and Investment Banking)
Mayur asked “Isn’t financial modeling also useful for analyzing securities? What kind of roles does that lead to? “. Nitin remarked” Indeed, financial modeling is a useful skill for analyzing securities. These securities may be debt or equity. A financial model that estimates the future earnings for a company will be based on the assumptions of critical inputs and analysis of future possibilities. Debt security analysis will focus on company’s ability to take loans and repay loans, without impacting the operations of the company. Equity analysis will focus on returns to the equity holder i.e. cash profits generated by the company after accounting for all the costs.”
(Refer to Financial Modeling and Credit Analysis)
“Another interesting opportunity is project finance analyst. Here the analysis revolves around financing a project such that the project cash flows are itself responsible for repayment of the debt taken for the project. Project financing is then achieved using debt and equity components. Financial models will be created for the project after incorporating the assumptions for the revenue and costs likely to be incurred over the project life. Since the model is based on forecasts, sensitivity analysis is also carried out.”
(Refer to Financial Modeling and Project Finance)
Pooja asked “Great! But, all these roles are in the context of the capital markets and banking. Are there any roles beyond these domains?” Nitin said, “Financial modeling is a versatile skill. It can be used across domains. Wherever there is a need to analyze large amounts of data, the concepts in financial modeling can be applied. As a result financial modeling can be applied to any kind of analytics. Financial modeling is primarily carried out using MS-Excel. Hence automatically one develops expertise in MS-Excel too. “
Nitin would have been happy to answer more questions from his friends. But, just then the bell rang, signaling the end of the break and all of them rushed back to their class.