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Am I required to create a Financial Model from scratch or can I rely on a template?

Given the extreme tight timelines faced by IB analysts to turn around financial models (deadline was yesterday!), it is easy to fall to temptation of a ready made template.

However, there are some pitfalls to this approach

1) Blind Faith: Using a template (with a shallow understanding of it) and blindly hard punching numbers to it is nothing short of sitting on a pile of uranium, you will pay for it sooner or later.

2) Uniqueness: Every project/mandate will have uniqueness to it. You have to respect it. Templates will nullify this uniqueness.

3) Audit: You will be required to do some deep level of scrutiny to wipe off any previous adjustments before using a template (which increases the chances of mistakes)

So how does one tackle this dilemma?

I typically advise using a mix of both the approaches. Lets see how this works

Most of the variations of Financial models in investment banking mostly revolve around

1) DCF

2) M&A

3) LBO

4) Comparable & Transaction Comps

Idea Bank - From Scratch to Template:

Build a comprehensive version of each of the above varieties of financial models from scratch. Create a repository, your idea-bank!

Recreate blank templates of them if your organization has created few pre-defined models. Get comfortable with them, make them your backyard.

These models will serve as your go-to-repository or an idea bank when you start taking up new projects.

Remember, a model is first created in your head and then in excel.

Study the data in your hands, envision a blueprint in your head and then fall back to the idea-bank you have created.

For example:

If I am undertaking a project where a fund infusion is expected to massively change the capital structure of a company then

- Using the Balance Sheet Template of an LBO model will make the best sense, as you can make adjustments to the existing balance sheet and create a new pro-forma version

- The P&L, CFS can be adopted from a plain vanilla 3-Statement Model

Remember, keep the original versions free from any data. They serve you purely for getting design ideas.

This will eventually give you speed and confidence. It can be summarized as 15% from scratch and 85% template approach.

Follow me/Wizenius for more interesting tricks in financial modelling, investment banking


Pratik S


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