Building a financial model is as much an art as it is a science.

When you’re giving a set of historical financial statements, it will be necessary to reconstruct the historical with a model. This is necessary step in order to understand how the numbers fit together. This is the science part.
The art is extending the financial model and forecasting the future performance of the company based on assumptions. Every line item on the income statement and balance sheet can be changed by changing assumptions.

** Interview Tip – When you’re expected to build a financial model, it is very important to get the math right, but it is just as important to be able to explain your assumptions.

  • Emma Tameside

    I agree with this totally! But that’s why there’s professionals like us who do the modelling and not just an off the shelf Excel spreadsheet… we’d be out of the job if it was purely scientific!

    I find it’s easier with a good set of income statements and balance sheets, and I dread the scenarios where I’m asked to financially model for an untested startup or product. That’s where it really becomes an art and we have to make a lot of assumptions just to arrive at even the most basic of calculations. Still, financial modelling is one of the best real-life skills I learned on my CFA program, and I use modelling probably a few times a week. It’s always best to document any assumptions and how you arrive at calculations too, as you never know who will be building upon and scrutinising them.