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Why financial modeling has become an essential skill

Written by: Ian Schnoor, Executive Director, Financial Modeling Institute
Published on: 11 Apr 2024

Have you seen roles advertised that ask for “strong financial modeling skills?  Financial modeling has become one of the most in-demand skills required by accounting professionals globally.  This is because financial models are used extensively for decision making.

Let’s take a look at this important skill set for accounting professionals, and how mastery of financial modeling can boost your career.

 

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What is financial modeling?

In accounting and finance, financial modeling simply means creating a forecast. Inputs relevant to a financial model include:

●    Determining how long to forecast (typically 3 to 10 years)
●    Using a chosen periodicity (monthly, quarterly or annually)
●    Building within a spreadsheet software (Excel being the most common)

Financial modeling is a multi-disciplinary skill. It requires strong proficiency in accounting, finance, planning and collaboration, design, and Excel. But fundamentally, a financial model is a forecast of a company’s financial statements.

 

The importance of financial modeling

Any professional who is required to build a forecast for a company, project or department, is involved in financial modeling. Financial models are used to make the following critical decisions:

●    Planning / forecasting
●    Credit
●    Capital budgeting
●    Investment
●    Mergers and Acquisitions
●    Valuation

Financial modeling is important because of the breadth and scale of decisions that rely upon models.

 

Wait. There is a problem…

We know that effective financial models are the best tool we have to make critical business decisions. But we have a problem…  Most financial models are a mess. They don’t follow best practices, they are poorly designed, and they often contain errors and inconsistencies. As a result, many financial models are nearly impossible to use to make financial decisions. Have you ever worked with a financial model that someone else built? Did you find hardcoded values in the file? Did you see long formulas linked to many sheets? Were there so many sheets that it made it difficult to understand?  These errors occur because most modelers are self-taught, or they took a course but haven’t had enough model building opportunities yet. If you have ever been frustrated by trying to navigate a financial model, it means that the model is not optimal. When a model is not optimal, it is not effective.

 

Strong financial modeling skills can transform your career

When you can build a financial model that is well planned and effectively designed, the model will tell a story and help make optimal business decisions. Strong modeling skills enable you to become a valued decision maker.  The ability to create an effective 3-statement financial model of a company from scratch benefits you because now you can make a meaningful impact for your clients and stakeholders. How do you become a skilled financial modeler? Your accounting background means you are off to a great start. That, and you are going to have to practice. You will have to learn and demonstrate that you have the skills and discipline to build best-in-class financial models that avoid all the common errors. 

 

How to become an Advanced Financial Modeler (AFM)

Recognizing the importance of financial modeling skills in the accounting profession, ICAEW members have access to Financial Modeling Institute’s Advanced Financial Modeler (AFM) accreditation program. AFM accreditation allows ICAEW members to distinguish themselves professionally and demonstrate that they have the financial modeling skills most valued by clients and employers worldwide.  

AFM candidates must pass a rigorous, proctored, online exam in which they are provided with a case study and required to build a 3-statement financial model of a company from scratch in 4 hours. Public exams are offered four times a year. Learn more here.

 

Planning to make the next step in your chartered accountancy career?  ICAEW Jobs can support your career journey. You can find out more about the latest job opportunities and careers advice on the ICAEW Jobs website today.