how critical is economics to building financial models?
Appreciate inputs of the board to understand if and how much of economics is critical to building financial models from scratch. I presume a basic understanding of economics would be required to draw assumptions but how much is enough and how much is too much?
Thanks for your time!
Pretty much none. Off the top of my head, the only place I can imagine it taking place if you're trying to get a grasp of what growth rate to put on terminal value. I guess in the general sense, making an educated guess about our future economy is part of the modeling process. But really, you don't need any background in economics to make those deductions - not even the economists get it right.
There might be some fringe uses of economics in banking, but those applications are far and few between. Moreover, why don't you take a look at a model or build one yourself to find out?
As a general rule of thumb, you only need the following:
The 3 statements and their projections going forward. Or at minimum, a guess at a free cash flow growth rate.
Capital structure or at least a guess on an appropriate discount rate.
An idea of exit multiple or terminal growth.
Thank you, @Sav , That was pretty detailed. Have an interview in some days. I will look at models and will purchase a modeling course in the next 2 weeks and am reading/studying the basics of finance so that I don't have to go back once I begin the course. Before making the purchase, I was curious about the need to study economics and its use in modeling because I can allocate time only to things that will help me to build models from scratch
Depends on what level of economics you look at. Industry growth trends may be highly relevant for models, particularly if you are prepping for pitches and have limited insight into a Company's forward-looking IS.
So, it might be helpful in industry research? Some inputs in the model would definitely draw from industry research or knowledge, and thus it would make economics one of the important things to know in order to model successfully...?
Like I said, economics might apply to banking, but only in the broadest of senses. For the most part, you don't need to know anything specific about it to be a banker.
You need to know the relevant macro factors impacting the industry your company is in. Those factors might influence your model assumptions/inputs. While knowing the very basics of economics is useful for backing up your thesis and assumptions, it will not make you "model successfully". I never had to use anything outside of my 100 level intro to econ course and I cover a sector that is pretty big on macro.
It sounds like you have no idea what building a company model involves. So why don't you read up on that first before asking vague questions...
You're correct, Flake. I have absolutely no idea. I have 2-3 weeks of paid leave, though, before an interview and I sought the opinion of experts in knowing which things I should leave out and which ones I should dig in that time. A little bit of bashing always happens when a newbie enters the scene..but enduring that is better than not asking the vague questions and dedicating time to study something irrelevant. Based on the responses above, including yours, this post has helped me tremendously while at the same time exposing my absolute lack of knowledge/experience. I now know that I need to dig only the basics of economics. I am grateful to all those who replied and will make sure I look at a model asap.
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