Analyst & Modeling in M&A/LBO/etc
Hi Guys,
I am sure that this query would be putting many of the elite members here off given that it is a very traditional question having been answered numerous times in the past, but I being a newbie in this industry seek some advice and understanding of activities an Analyst would undertake.
So basically from a technical perspective, I heard alot about "you should know financial modeling, be able to build a financial model etc etc", could someone clarify as to what exactly is being referred to as build a financial model.
From what i understand the firms already have model templates for the kind of portfolio/clients they deal with and its a matter of inputting numbers in that excel template and there you have the output. If so is the case, then why the requirement of "be able to build a financial model". If in case, an analyst would be required to build a financial model for whatever reason, could someone indicate as to what exactly would involve in "building" a financial model.
I have read through a book -building financial model by John Tjia -which reflects how an input set of financial statements are constructed and then an output etc etc. That task appeared very tedious with all the formulas being used in excel etc etc. I was unsure whether an analyst really goes THAT far on an everyday basis to construct a model. That would consume an entire day specially when the basics of any financial model -income statement, balance sheet,etc would remain the same -I mean a current asset would remain a current asset and a revenue figure would remain wherever it is on the model -So it doesnt quite make much sense to me as.
Sorry if i sound stupid and way off track from an analyst's position -but i am just trying to make some sense out of the whole situation.
All help is appreciated guys.
Thanks
very few ppl are gona read this essay
I am seeking constructive input here. Those willing to offer a word or two of their advice are most welcome.
A basic template of a "financial model" by itself is not very complex...but now add these complexities:
1) 20 different financing scenarios 2) 20 different M&A options with various projections of the target and the acquirer
...the real world is MUCH more complex than any template can handle, so without a very strong understanding of accounting, the 3 statements (and M&A or restructuring or whatever group you work in), etc...an analyst will be lost and just getting the balance sheet to balance could take all day.
An analyst isn't necessarily building a model EVERY day -- usually, they have several models they are working on at any given time, each one for a particular transaction. The issue is that each of these models can become very complex as more scenarios are added and more variables are taken into account.
Some deals are relatively clean and you can get by with relatively minor adjustments to the template -- others are a complete nightmare. but it is completely deal specific.
not sure if that is what you were looking for but good luck.
-Patrick
Thanks Patrick ! your response clarified the ambiguity I had. So as you indicated that understanding of the accounting basics/various financial statements is a must -is it the theoretical understanding of the flows and inter-connectivity of these statements that is a bottomline for an analyst or should an analyst master this theoretical understanding "via" the excel modeling viz a viz -be able to 'construct' the balance sheet/IS etc on excel/link it up etc.
As you may have guessed already, I am a potential entrant in this industry/sector and I have little 'modeling' experience using excel. I currently work on similar transactions/lending/funding at a commercial banking level and where we have templates used across the board at the firm and softwares that generate the projections etc and as such 'manual' modeling is minimal. And i hear alot about how an analyst needs to know how to 'construct the model from scratch' -i wondered exactly what was considered constructing a model from scratch. I assume the financial modeling of the 'inputs' and outputs (projections etc) being that.
So another question if I may ask (and again a question very basic to most of the experienced members here) would be whether the analysts infact use the excel formulas/tools etc on each occasion when they do build a financial model. If so, should i safely assume that a very practical understanding and working knowledge of excel and related tools is a must for an analyst.
The reason I ask so is that I was trying to practice building my first model and half way through (i constructed the input statements) I realised how tedious it was to link all the columns with various formulas etc and whether infact it was actually worth while to learn how to build a model in this fashion.
Thanks again for your input.
you need to learn to be more concise my friend.
Okay Ruby Rhod, concisely, does an analyst use excel tools/formulas etc often while building a financial model? If so, I am assuming they would need to remember their usage off the top of their head. Is that what you call 'constructing a model from scratch'?
In modeling, there are few times when you're using crazy functions. Most of the time, if you're even using a function, it'll be a simple IF or VLOOKUP or something pretty straightforward -- generally for different scenarios. May have to use an NPV calculation or something, but those are straight-forward. In a general three-statement model, you'll use very. very basic formulas -- i.e. modeling forward revenue off a growth rate, or calculating days for A/P or A/R based on COGS/revenue and a prior period's days. It's not rocket science, and the formulas are rarely too complicated (can get a bit heavier when you get to debt/PPE schedules, but even still, once you do it once or twice you're fine).
Building a model from scratch is, for example, grabbing some financials from EDGAR and inputting the numbers into Excel and then building out "projections" for the number based around reasonable assumptions (which can generally be driven from historical performance, or, in the case of a banker, whatever your boss says). A working model will flow from top to bottom across all three statements, and when you change one input (i.e. revenue growth rate, or capex as a % of revenue), it flows throughout the entire model without busting. This goes without saying, but a successful model from scratch will also be formatted in a way that is presentable to seniors/clients.
This does not address valuation methods. To be honest, multiples valuations are very basic, and DCFs, while a bit more complicated, are very simple -- once you do it one time, it pretty much takes 15 minutes to perform it (assuming you have a projection model already built and don't need to calculate WACC based on comps). At this point, DCFs and LBOs are simply templates that you drop into your Excel, link everything up, and BOOM -- that's that. Sure, it's nice to know how to do it from scratch (and I'd highly suggest to break down the DCF/LBO template the first time you use it so you know where every number goes and comes from, and WHY), but you get to a point where you know how to do it and want to get it done as fast as possible, so you just grab the sheet, toss it into the currently model and link everything up so it outputs what you're looking for.
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