How can you create financial models that accurately reflect a company's performance?

1 Gather relevant data

The first step in creating a financial model is to gather relevant data from various sources, such as financial statements, industry reports, market research, and company presentations. You need to collect and analyze historical and current data on the company's revenue, expenses, assets, liabilities, cash flows, and growth drivers. You also need to benchmark the company against its competitors and peers, and identify its strengths and weaknesses. The data you gather will help you understand the company's business model, operations, and financial performance, as well as the opportunities and risks it faces.

2 Build a forecast

The next step is to build a forecast based on the data you collected and the assumptions you made. A forecast is a projection of the future financial performance of the company, usually for a period of three to five years. You need to estimate the future revenue, expenses, cash flows, and profitability of the company, as well as its capital structure and valuation. You can use different methods and techniques to forecast different financial items, such as growth rates, margins, ratios, multiples, and discounted cash flows. You need to justify your assumptions and explain how they are derived from the data and the industry trends.

3 Validate and test the model

The final step is to validate and test the model to ensure its accuracy, reliability, and robustness. You need to check the model for errors, inconsistencies, and logical flaws, and make sure that it is aligned with the company's strategy and goals. You also need to test the model for sensitivity and scenario analysis, which means assessing how the model reacts to changes in key variables and assumptions, such as growth rates, costs, market conditions, and exit multiples. This will help you evaluate the potential outcomes and risks of the investment, as well as identify the key drivers and levers of value creation.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?