Things Needed

  • ['MS Excel', 'A basic understanding of financial statements']

Whether you work in M&A, equity research or private equity, the key to any entry-level financial position is building a financial model. This may seem like a difficult task for the beginner, but if you break it down, you should be able to build a great model, and maybe even impress your boss.

Determine the purpose and audience of your model. Although most models will be similar, how you present various metrics will be different depending on your audience.

Build an assumptions page. The first page in your file should lay out all of the assumptions used in your model. For example, if you're modeling out a subscription-based company, you should clearly outline the revenue drivers (e.g. number of subscriptions and average price).

Build your Profit & Loss statement. Your audience will determine how detailed your P&L should be, but you should at least have the major line items - Revenue, COGS, SG&A, EBIT, and Net Income. Your forecasted numbers should always be pulling from your assumptions page (e.g. revenue growth). This way, your audience will be able to see how the different metrics change based on the assumptions.

Build your Balance Sheet. Again, this should pull from your assumptions page (e.g. CapEx as a percent of Revenue). Also, make sure to link your Balance Sheet and P&L where applicable (e.g. linking Net Income to Retained Earnings). Again, your audience will determine how much granularity you want to show.

Build your Statement of Cash Flows. If built properly, this should be easy to link up to your P&L and Balance Sheet. Make sure to show Beginning Cash Balance, Cash Flow from Operations (CFO), Cash Flow from Financing (CFF), and Cash Flow from Investing (CFI), and Ending Cash Balance. Make sure that your ending cash balance is linked to your Balance Sheet.

Add checks to make sure that everything ties. This is possibly the most important step. No matter who your audience is, you will lose all credibility if your numbers don't tie. This can be prevented by building checks into your model. For example, subtract your cash balance in your Balance Sheet from the ending cash balance on your Statement of Cash flows - if it doesn't equal zero, you'll need to adjust a formula or two. I've seen people build these into the financial statements themselves, while I've also seen them build a whole new sheet for these types of checks. It's your own preference.


  • Keep it simple. Often, the simplest models are the best. If you try to get too fancy, you're likely to wast time and confuse your audience. Format every sheet for printing. It's annoying when someone sends you a file and it prints awkwardly