Learn about the most widely used financial models and how to minimize errors when building them. Gain insights on the best practices for Excel when creating a financial model to boost your career in finance.
Key Insights
- The major financial models include the Three Statement Model, DCF model (Discounted Cash Flow Analysis), LBO model (Leveraged Buyout), M&A Model (Mergers and Acquisitions), Trading Comps Model, and Transaction Comps Model.
- In order to minimize errors when building financial models, a structured approach is recommended.
- Using Excel efficiently is crucial while building a model, and it is recommended to limit or eliminate the use of a mouse as keyboard shortcuts are much faster.
- Incorporating a blue font for hard codes and inputs is a suggested best practice. Formulas, however, should remain black.
- Keeping formulas simple and breaking down complex calculations into steps can enhance the effectiveness and accuracy of the financial model.
- Using cell comments for explanations ensures the model is easy to follow, both for current users and when revisited in the future.
Build a Financial Model
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Lay Out Assumptions
Inputs at the top, color-coded blue — never hardcoded in formulas.
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Build the Income Statement
Revenue, COGS, OpEx, EBITDA — driven by assumptions.
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Add Balance Sheet
Working capital, fixed assets, debt — must balance.
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Cash Flow Reconciles
Operating, investing, financing — ties to balance sheet cash.
The most famous and widely used financial models are:
- Three Statement Model
- DCF model (Discounted Cash Flow Analysis)
- LBO model (Leveraged Buyout)
- M&A Model (Mergers and Acquisitions)
- Trading Comps Model
- Transaction Comps Model
- Other
In order to minimize errors when building your financial models, follow five basic steps:
Excel Tips for Financial Modeling
It’s very important to follow best practices in Excel when building a model:
- Try to limit or eliminate the use of your mouse (keyboard shortcuts are much faster)
- Incorporate a blue font for hard codes and inputs (but formulas should stay black)
- Keep formulas simple and break down complex calculations into steps
- Make use of cell comments (Shift + F2) for explanations, so the model would be easy to follow for you when you come back to it later as well as for the other users
Recommended Set Up (ALT F T F)
