{"id":30710,"date":"2025-01-10T12:21:32","date_gmt":"2025-01-10T17:21:32","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=30710"},"modified":"2025-04-02T18:52:07","modified_gmt":"2025-04-02T23:52:07","slug":"how-to-learn-financial-modeling","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/finance\/how-to-learn-financial-modeling\/","title":{"rendered":"How to Learn Financial Modeling: The Cyberpunk, the Witcher, and the Wardrobe"},"content":{"rendered":"<p>Many people say that if you want to \u201clearn financial modeling,\u201d you should <strong>pick a company you\u2019re interested in<\/strong> and try to build a financial model for it.<\/p>\n<p>For example, I am a huge fan of <a href=\"https:\/\/en.wikipedia.org\/wiki\/CD_Projekt\" target=\"_blank\" rel=\"noopener\">CD Projekt Red<\/a>\u2019s video games, such as <em>The Witcher 3<\/em> and <em>Cyberpunk 2077<\/em>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30711 size-full\" title=\"Cyberpunk 2077 Play Time\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time.jpg\" alt=\"Cyberpunk 2077 Play Time\" width=\"2088\" height=\"774\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time.jpg 2088w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time-300x111.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time-1024x380.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time-768x285.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time-1536x569.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121440\/01-Cyberpunk-Play-Time-2048x759.jpg 2048w\" sizes=\"(max-width: 2088px) 100vw, 2088px\" \/><\/p>\n<p>So, if I wanted to learn financial modeling, people might recommend that I download CDPR\u2019s filings and presentations, open an Excel sheet, and start building a model based on assumptions such as:<\/p>\n<ul>\n<li>When will <em>The Witcher 4<\/em> come out?<\/li>\n<li>How much will it cost to develop, and how many copies will it sell?<\/li>\n<li>Will there be <a href=\"https:\/\/en.wikipedia.org\/wiki\/Downloadable_content\" target=\"_blank\" rel=\"noopener\">DLC<\/a> or a subscription service?<\/li>\n<\/ul>\n<p><strong>The problem is that this advice is misguided, and modeling a company like CDPR \u2013 even though I love their games \u2013 is <em>not<\/em> a good way to learn financial modeling.<\/strong><\/p>\n<p>The main issue is that many of these \u201cfun companies\u201d (e.g., in games and media) have unpredictable revenue streams that are difficult to forecast:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30712 size-full\" title=\"CD Projekt Red Revenue\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats.jpg\" alt=\"CD Projekt Red Revenue\" width=\"2468\" height=\"610\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats.jpg 2468w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats-300x74.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats-1024x253.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats-768x190.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats-1536x380.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121511\/02-CDPR-Stats-2048x506.jpg 2048w\" sizes=\"(max-width: 2468px) 100vw, 2468px\" \/><\/p>\n<p>You\u2019re much better off learning financial modeling based on <strong>simple, boring companies<\/strong> with easier-to-predict revenue, expense, and cash flow line items.<\/p>\n<p>A good example is Walmart from our <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF modeling tutorial<\/a>; a company like Otis (elevator manufacturer) in our <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement modeling tutorial<\/a> could also work.<\/p>\n<p>Also, it\u2019s critical to <strong>watch someone else<\/strong> build a few models first, understand the process, and then try building your own models from templates.<\/p>\n<p>Once you\u2019ve mastered these steps, you can move on to more open-ended models.<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-07-How-to-Learn-Financial-Modeling-Slides.pdf\" target=\"_blank\" rel=\"noopener\">How to Learn Financial Modeling \u2013 Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-07-WMT-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Walmart \u2013 Financial Statement Excerpts (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-07-WBD-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Warner Brothers \u2013 Financial Statements Excerpts (PDF)<\/a><\/li>\n<\/ul>\n<h2><strong>How to Learn Financial Modeling, Part 1: Watch and Imitate<\/strong><\/h2>\n<p>We <strong>disagree<\/strong> with the advice that you should just download a company\u2019s filings and presentations and start typing away in Excel.<\/p>\n<p>Before doing that, you should review at least 3-4 examples of someone building a financial model, such as 3-statement projections.<\/p>\n<p><a href=\"https:\/\/breakingintowallstreet.com\/breaking-into-wall-street-courses\/\">Our courses<\/a> have many, many examples of this, but you could also use books or even our <a href=\"https:\/\/breakingintowallstreet.com\/kb\/\">free tutorials<\/a>.<\/p>\n<p>The <strong>most important points<\/strong> are:<\/p>\n<ol>\n<li>To understand <em>the purpose<\/em> of the model (e.g., To value the company? Estimate its financing needs? Something else?).<\/li>\n<li>To understand <em>the logic<\/em> of each step in the process. For example, <em>why<\/em> do you typically save the Interest Income and Expense projections until the end? Why are Working Capital items such as Accounts Receivable linked to Income Statement lines such as Revenue?<\/li>\n<\/ol>\n<p>Focus on the <strong>revenue, expense, and cash flow projections<\/strong> in this step.<\/p>\n<p>Yes, other topics will come up in interviews, but you really need to understand these fundamentals before moving into merger models, M&amp;A models, or even basic valuation.<\/p>\n<p><strong>One Final Note:<\/strong> If you don\u2019t feel confident in your <strong>accounting knowledge<\/strong>, you may need to do a quick review before you attempt to project the financial statements.<\/p>\n<p>Accounting is a bit different from financial modeling, but all modeling requires at least <em>some<\/em> accounting knowledge \u2013 so you should take the time to learn about the three statements and how they link together (we have tutorials on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/\">Income Statement<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/\">Balance Sheet<\/a>, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\">Cash Flow Statement<\/a>).<\/p>\n<p><a href=\"https:\/\/www.accountingcoach.com\/\" target=\"_blank\" rel=\"noopener\">AccountingCoach.com<\/a> is a good source for learning about specific line items:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30713 size-full\" title=\"Accounts Payable Definition\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121544\/03-Accounts-Payable.jpg\" alt=\"Accounts Payable Definition\" width=\"1292\" height=\"596\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121544\/03-Accounts-Payable.jpg 1292w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121544\/03-Accounts-Payable-300x138.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121544\/03-Accounts-Payable-1024x472.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121544\/03-Accounts-Payable-768x354.jpg 768w\" sizes=\"(max-width: 1292px) 100vw, 1292px\" \/><\/p>\n<h2><strong>How to Learn Financial Modeling, Part 2: Practice with Templates and Case Studies<\/strong><\/h2>\n<p>Once you\u2019ve watched someone build a model or read through the entire process, it\u2019s time to <strong>practice yourself<\/strong>.<\/p>\n<p>At this stage, you should stick to \u201cpartial templates,\u201d such as Excel files that have the line items and historical data entered but nothing for the projections:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30714 size-full\" title=\"Financial Model from Template\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template.jpg\" alt=\"Financial Model from Template\" width=\"2070\" height=\"862\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template.jpg 2070w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template-300x125.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template-1024x426.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template-768x320.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template-1536x640.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121622\/04-Financial-Model-from-Template-2048x853.jpg 2048w\" sizes=\"(max-width: 2070px) 100vw, 2070px\" \/><\/p>\n<p><strong>You want to test your ability to link different items and make reasonable forecasts for growth rates, margins, unit sales, and employee counts.<\/strong><\/p>\n<p>So, in this step, you want to practice case studies with the following qualities:<\/p>\n<p><strong>1) Open-Ended Instructions<\/strong> \u2013 They should not tell you exactly \u201chow\u201d to project each line item or what growth rates or margins to use. They should require your judgment:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30715 size-full\" title=\"Overly Specific Case Instructions\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions.jpg\" alt=\"Overly Specific Case Instructions\" width=\"1580\" height=\"978\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions.jpg 1580w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions-300x186.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions-1024x634.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions-768x475.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121650\/05-Case-Instructions-1536x951.jpg 1536w\" sizes=\"(max-width: 1580px) 100vw, 1580px\" \/><\/p>\n<p><strong>2) Unit-Level Forecasts<\/strong> \u2013 You should find case studies that require <em>more than<\/em> simple percentage growth and margin forecasts. For example, revenue might be based on Units Sold * Average Selling Price or # Locations * Sales per Location. The expenses and cash flows should also be tied to these separate drivers somehow.<\/p>\n<p>For example, retail companies need to spend more on <strong>Capital Expenditures (CapEx)<\/strong> to open brand-new locations than to maintain existing ones.<\/p>\n<p>If you\u2019re modeling simple percentages rather than going to the unit or location level, you could easily make implausible assumptions.<\/p>\n<p><strong>The models you build in this stage should <em>not<\/em> be that complex.<\/strong><\/p>\n<p>In fact, it\u2019s counterproductive if your Balance Sheet has 25 separate line items or your Cash Flow Statement has dozens of different lines.<\/p>\n<p><strong>You want <em>simple<\/em> financial statements, with most of your time and effort put into forming the appropriate revenue, expense, and cash flow assumptions.<\/strong><\/p>\n<p>If you see a case study with complex statements, run!<\/p>\n<p>Find something else with simplified\/consolidated statements so you can focus on the big picture.<\/p>\n<h2><strong>How to Learn Financial Modeling, Part 3: Practice Without a Template<\/strong><\/h2>\n<p>Once you\u2019ve practiced with a few templates and case studies (perhaps 2 \u2013 3, depending on your time and skill level), it\u2019s time to try a <strong>more open-ended case study<\/strong>.<\/p>\n<p><a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">We have an example of this for Otis<\/a>, an elevator manufacturer.<\/p>\n<p><strong>Focus on companies with simple, straightforward financial statements.<\/strong><\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>A few criteria in order of \u201cmost to least important\u201d include:<\/p>\n<ol>\n<li><strong>Simple Financial Statements<\/strong> \u2013 You don\u2019t want companies with 30 line items on the BS or CFS. Search for companies in <a href=\"https:\/\/mergersandinquisitions.com\/technology-investment-banking-group\/\" target=\"_blank\" rel=\"noopener\">tech<\/a>, <a href=\"https:\/\/mergersandinquisitions.com\/consumer-retail-investment-banking-group\/\" target=\"_blank\" rel=\"noopener\">consumer\/retail<\/a>, <a href=\"https:\/\/mergersandinquisitions.com\/industrials-investment-banking\/\" target=\"_blank\" rel=\"noopener\">industrials<\/a>, <a href=\"https:\/\/mergersandinquisitions.com\/business-services-investment-banking\/\" target=\"_blank\" rel=\"noopener\">services<\/a>, or <a href=\"https:\/\/mergersandinquisitions.com\/healthcare-investment-banking-group\/\" target=\"_blank\" rel=\"noopener\">healthcare<\/a> with ~10 line items or less on each side of the Balance Sheet.<\/li>\n<li><strong>Pure-Play Business with Clear Drivers<\/strong> \u2013 If something is more complicated than 2 \u2013 3 key revenue drivers, it\u2019s not a great example to learn from. We like <strong>retail companies<\/strong> because revenue equals # Locations * Sales per Location or # Square Feet * Sales per Square Foot. Avoid companies with multiple different business lines, especially if they\u2019re unrelated.<\/li>\n<li><strong>Good Investor Presentations<\/strong> \u2013 These presentations should disclose key data about the company\u2019s market, unit sales, utilization rates, and pricing. You ideally want companies whose presentation data can be fed directly into your financial model.<\/li>\n<\/ol>\n<p>As a specific example, let\u2019s say you\u2019re considering using <a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-07-WMT-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Walmart<\/a> or <a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/101-07-WBD-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Warner Brothers<\/a> for your open-ended model.<\/p>\n<p><strong>By looking at Warner Brothers\u2019 Income Statement for 5 seconds, you can tell it will be more difficult to model:<\/strong><\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30716 size-full\" title=\"Warner Brothers Revenue\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121824\/06-Warner-Bros-Revenue.jpg\" alt=\"Warner Brothers Revenue\" width=\"1209\" height=\"760\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121824\/06-Warner-Bros-Revenue.jpg 1209w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121824\/06-Warner-Bros-Revenue-300x189.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121824\/06-Warner-Bros-Revenue-1024x644.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121824\/06-Warner-Bros-Revenue-768x483.jpg 768w\" sizes=\"(max-width: 1209px) 100vw, 1209px\" \/><\/p>\n<p>You might still want to model Warner Brothers in the future, but as a <em>starting point<\/em>, Walmart is a better option.<\/p>\n<p>We recommend completing at least 2 examples of these open-ended models for companies in different industries.<\/p>\n<p>There\u2019s no way to check if you\u2019re \u201ccorrect\u201d without having someone else review your model\u2026<\/p>\n<p>\u2026but one simple method is to <strong>cross-check<\/strong> your revenue, net income, and EPS estimates with consensus forecasts for the company.<\/p>\n<p>For example, go to <a href=\"https:\/\/finance.yahoo.com\/\" target=\"_blank\" rel=\"noopener\">Yahoo Finance<\/a> and see how your numbers over the next few years compare:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-30717 size-full\" title=\"Walmart Financial Estimates\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates.jpg\" alt=\"Walmart Financial Estimates\" width=\"2278\" height=\"1508\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates.jpg 2278w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates-300x199.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates-1024x678.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates-768x508.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates-1536x1017.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/01\/10121923\/07-WMT-Estimates-2048x1356.jpg 2048w\" sizes=\"(max-width: 2278px) 100vw, 2278px\" \/><\/p>\n<p>Your model is not necessarily \u201cwrong\u201d if your estimates are different \u2013 but in <em>this stage<\/em> of the learning process, you should aim for similar forecasts.<\/p>\n<h2><strong>How to Learn Financial Modeling, Part 4: Practice with More Complex Industries and Companies<\/strong><\/h2>\n<p>Once you feel comfortable with basic revenue, expense, and 3-statement forecasts for \u201cstandard\u201d companies, you can move into more challenging scenarios.<\/p>\n<p>The starting point should be <strong>companies with \u201cmessier\u201d financial statements<\/strong>, as this is a common real-world occurrence on the job.<\/p>\n<p>We have a separate tutorial on <a href=\"https:\/\/www.youtube.com\/watch?app=desktop&amp;v=5QU8AwvsW8U\" target=\"_blank\" rel=\"noopener\">how to consolidate the financial statements<\/a> in these cases, but here are our overall guidelines:<\/p>\n<ul>\n<li><strong>Income Statement:<\/strong> You should not change too much here; if the company has too many different revenue or expense lines, perhaps consolidate them down to 1 \u2013 2 major ones and an \u201cOther\u201d category for everything else.<\/li>\n<li><strong>Balance Sheet:<\/strong> Aim for 5 \u2013 10 items on each side and combine &#8220;Short-Term&#8221; and &#8220;Long-Term&#8221; versions of items like Debt, Deferred Revenue, Investments, etc. Create a single \u201cNet\u201d Deferred Tax Liability and show Common Shareholders\u2019 Equity or <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/statements-of-owners-equity\/\">Owners\u2019 Equity<\/a> as a single line.<\/li>\n<li><strong>Cash Flow Statement:<\/strong> Cash Flow from Operations should start with Net Income, add back D&amp;A, have a Deferred Tax line item, and have maybe 1 \u2013 2 other items, including smaller ones that you put in an \u201cOther\u201d category. Make the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\">Change in Working Capital<\/a> section match your simplified Balance Sheet. Cash Flow from Investing should consist of CapEx and perhaps 1 \u2013 2 other lines for Investments, Acquisitions, or Intangibles. Cash Flow from Financing should consist of Stock Issuances\/Repurchases, Debt Issuances\/Repayments, and Dividends, with an \u201cOther\u201d line item to consolidate the rest.<\/li>\n<\/ul>\n<p>One approach is to look at an \u201cidealized\u201d version of a 3-statement model, compare it to your company\u2019s, and keep consolidating until it more closely resembles that version.<\/p>\n<p>Learning <strong>different industries<\/strong> depends on the types of <a href=\"https:\/\/mergersandinquisitions.com\/investment-banking\/industry-groups\/\" target=\"_blank\" rel=\"noopener\">investment banking groups<\/a>, companies, or teams you plan to apply to.<\/p>\n<p>For something like <a href=\"https:\/\/mergersandinquisitions.com\/financial-institutions-group\/\" target=\"_blank\" rel=\"noopener\">FIG (commercial banks and insurance)<\/a>, you will probably need specialized training because of the vast differences.<\/p>\n<p>In areas like <a href=\"https:\/\/mergersandinquisitions.com\/power-utilities-investment-banking\/\" target=\"_blank\" rel=\"noopener\">power &amp; utilities<\/a>, you can probably learn some key points and simply extend your knowledge of modeling concepts.<\/p>\n<h2><strong>How Well Do You Need to \u201cLearn Financial Modeling?\u201d Is it Necessary for Interviews?<\/strong><\/h2>\n<p>We\u2019ll conclude this article by addressing a <strong>common criticism<\/strong> leveled at trainers and financial modeling providers.<\/p>\n<p>Many people argue that it\u2019s \u201cpointless\u201d to learn financial modeling, especially for entry-level investment banking interviews, because you\u2019ll never have to complete a modeling test in interviews.<\/p>\n<p>They argue that you should save this process until you win an internship or full-time job and then spend time learning financial modeling in the months before you start.<\/p>\n<p><strong>They\u2019re half right.<\/strong><\/p>\n<p>It\u2019s true that, at least in the U.S., you\u2019ll rarely have to build a real financial model in an entry-level interview.<\/p>\n<p><em>However<\/em>, that\u2019s not the main reason to learn financial modeling.<\/p>\n<p><strong>The main reason to learn financial modeling is to understand <em>the concepts<\/em> that will come up in technical interview questions.<\/strong><\/p>\n<p>For example, if you get a question about how Accounts Receivable going up by $100 changes the financial statements, you will be able to answer <em>far more effectively<\/em> if you\u2019ve built models that <em>use<\/em> Accounts Receivable.<\/p>\n<p>The same applies to dozens of other concepts, ranging from <a href=\"https:\/\/breakingintowallstreet.com\/how-to-calculate-unlevered-free-cash-flow\/\">how to calculate Unlevered Free Cash Flow<\/a> to <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/roic-vs-roe-and-roe-vs-roa\/\">how to calculate metrics such as ROA, ROE, and ROIC<\/a>.<\/p>\n<p><strong>The point is that you learn best by <em>doing<\/em><\/strong>.<\/p>\n<p>That said, you do <strong>not<\/strong> need to follow the steps above just to prepare for interviews.<\/p>\n<p>The step-by-step process here is more of an \u201con-the-job prep plan.\u201d<\/p>\n<p>For interviews, we\u2019d recommend the following:<\/p>\n<ol>\n<li><strong>Accounting<\/strong> \u2013 Know the 3 financial statements and how they link together.<\/li>\n<li><strong>3-Statement Models<\/strong> \u2013 Watch 1 \u2013 2 examples and practice one case study independently.<\/li>\n<li><strong>Valuation\/DCF<\/strong> \u2013 Do the same, but keep it easy and stick to simple cash flow forecasts rather than full 3-statement models.<\/li>\n<li><strong>Merger Model<\/strong> \u2013 Focus on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/eps-accretion-dilution\/\">basic EPS accretion\/dilution examples<\/a> and go through a few exercises related to these.<\/li>\n<li><strong>LBO Model<\/strong> \u2013 Focus on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/simple-lbo-model-excel\/\">simple LBO models<\/a> (30 \u2013 60 minutes). You don\u2019t need more than this unless you <a href=\"https:\/\/mergersandinquisitions.com\/private-equity-interviews\/\" target=\"_blank\" rel=\"noopener\">interview for private equity jobs<\/a> (and sometimes corporate development and other buy-side roles).<\/li>\n<\/ol>\n<p>This list is more of a set of recommendations for \u201cinterview prep\u201d rather than \u201chow to learn financial modeling.\u201d<\/p>\n<p>So, we\u2019ll take that as a sign to wrap up and leave you with these options for learning \u2013 whether you care mostly about interviews or you\u2019re more focused on internship\/job prep.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>To learn financial modeling, pick simple, boring companies with easy-to-predict revenue and expenses, watch someone else complete the process, and then try examples on your own, starting with partial templates and moving to open-ended examples without full instructions.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-30710","biws_kb","type-biws_kb","status-publish","hentry","kb_category-finance"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/30710","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=30710"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}