You’re a financial analyst. How can you be sure you’re using the best modeling tools?

1 Know your purpose

The first step to choosing the best modeling tool is to define your purpose and objective. What are you trying to achieve with your model? What kind of data are you working with? What are the key variables and assumptions that affect your analysis? Depending on your purpose, you might need different types of models, such as valuation, budgeting, forecasting, risk, or scenario analysis. For example, if you’re valuing a company, you might use a discounted cash flow (DCF) model, while if you’re planning a budget, you might use a variance analysis model.

2 Choose your software

The next step is to select the software or platform that you’ll use to build and run your model. There are many options available, from spreadsheets to specialized applications. The most common and widely used software for financial modeling is Microsoft Excel, which offers a lot of flexibility, functionality, and compatibility. However, Excel also has some limitations and drawbacks, such as errors, complexity, and security. Therefore, you might want to consider other alternatives, such as Google Sheets, Python, R, or MATLAB, depending on your preferences, skills, and requirements.

3 Follow the standards

The third step is to follow the standards and best practices for financial modeling. These are guidelines and conventions that can help you create clear, consistent, and reliable models that are easy to understand, maintain, and audit. Some of the standards and best practices include using consistent formatting, naming, and color coding; organizing your model into separate sections for inputs, calculations, and outputs; documenting your assumptions, sources, and formulas; using simple and logical formulas; and testing and validating your model for accuracy and sensitivity.

4 Update your skills

The fourth step is to update your skills and knowledge on financial modeling. Financial modeling is a dynamic and evolving field that requires constant learning and improvement. You need to stay on top of the latest trends, techniques, and tools that can enhance your analysis and efficiency. You can update your skills by taking courses, reading books and blogs, watching videos and webinars, joining forums and communities, and seeking feedback and mentoring from other experts.

5 Review your results

The final step is to review your results and communicate them effectively. You need to check your model for any errors, inconsistencies, or anomalies that might affect your conclusions and recommendations. You also need to interpret your results and present them in a clear and concise way that highlights the main findings, implications, and action points. You can use charts, graphs, tables, dashboards, or reports to visualize and summarize your results. You should also explain the assumptions, limitations, and uncertainties that underlie your model and how they might impact your analysis.