This is a well written book, that takes and guides you gently through the intricacies of building financial models. It demonstrates practical examples and allows you to practice with live examples. Recommended reading for all investment bankers.
I was looking for a textbook for my own Financial Modelling class. My goal was to find something that describes creating a financial model centered on cash flow, bottom up approach (from business processes to money) and is lean and flexible. For Internet startups that primarily use my class, this is a must: they have no history, no physical assets or debt and have to evaluate dramatically different strategies. I went through this book cover to cover (Kindle ed) and did not keep it.
What this book is good for:
- RATIO ANALYSIS. If you want a quick reference on how to compute ratios and what they mean - this book has a great chapter on it.
- PERIOD MODIFICATIONS. Different projections and discounting for end of period, mid-period (with proper formulas and even switches) is very useful.
What this book is not good for
- CASH FLOW. It is kept out of the picture, introduced late and is built from previously constructed BS and IS. For a large pre-existing business, you can get around with it, but for a situation where you are building a new business or doing a credit check, taking away WC adjustments (caused by accrual accounting) and noncash like D&A is only part of the story. You do want to see CF-O, CF-I and CF-F structured like by line. You do not get it.
- PLUGS. As some reviewers previously mentioned, you DO NOT use plugs. Ever. It is tantamount to changing a problem to fit the solution. Yes, the alternative is to project the CF coming from business operations, so that's what you should be doing in first place.
- FORECASTS. It's extrapolation by implication based on past history. No attempt to relate sales to advertizing spending or costs to manufacturing process, for example. A company is treated as an almost black box. Not good for internal startup use at all!
- M&, PE A AND LBO ANALYSIS. The way statements are done implies they are intended for old manufacturing companies undergoing capital transactions, which is fine. But the book stops short at showing how the models are used in transactions, what are the questions asked, etc.
- DECISIONS. How do you compute in Excel "DO PROJECT A, NOT B"? The book bypasses this ABC of DCFs.
- LEARNING ADVANCED EXCEL. Third of the book is Excel for beginners but this could have well been relegated to other book. We want to see how Excel is used for financial projections. First thing anyone should learn is that inputs should be kept separate from outputs, and outputs are not reports (i.e. finished printable financial pro formas). This book does not input values inside formulas, but reports and outputs are the same, and inputs can be scattered all over the model. Go find them. Named ranges are not used, cell validation (which is a way to make protected drop down list btw) appears in last chapter. In other words, the model a book advises to build is a product that an analyst can make fast but will have hard time sharing with a team - which is what models are predominantly for.
Surprisingly, this book is written by a former JPM model czar. It is the way JPM actually build its internal models? Can't believe it.
So far, will remain stuck to my Robert Higgins's Analysis for Financial Management (also McGraw, an amazingly clear and useful text) and keep looking.
I purchased this book to help me review some key financial modeling topics. The author does a great job of explaining several different methodologies for using plugs with financial statements. In addition, the author presents several nice methods for dealing with the dreaded interest-debt circular reference issue that is common in many banker models. One of the nicest thing is the author utilizes a few example spreadsheets that are further developed throughout the book by adding more complex logic. I would definitely recommend purchasing this book to add to your finance reference book library for work.
I bought this book a couple of months ago because I have to deal with financial models during my daily work. This book gives you a very good insight into the world of financial modeling with excel. The examples are easy to follow. But nevertheless there are some improvements possible: (a) It would be helpful to use names for important cells, (b) it would be helpful to describe the possibility of scenarios more in detail, (c) there should be some examples to create flexible charts with the Excel toolbar, (d) the chapter for the DCF valuation should be expanded
But despite of this possible improvements this book is a must have!!
When reading an instructional book one occasionally gets the impression that the author might not have much hands-on or professional experience. That is certainly not the case with "Building Financial Models". Throughout this introduction to financial modeling, one can sense that the author has worked extensively in the field. His list of tips, best practices, pitfalls to avoid, when to use - or not use - a certain function all seem to hint at hard-won knowledge that could only have come from years of experience and experimentation. In the same way that every regulation on a ship is the result of a disaster, I'd guess every tip or piece of advice he gives was also the result of a mistake being made. It's a very humble and thoughtful approach that lets the reader know there are many ways one can introduce errors into models - and how to best avoid doing so. The author made the various mistakes and notated ways to avoid them here with the hope that we won't repeat them. The result is a book that comes across as very credible and reassuring. One quickly realizes that the author is an expert about the subject which he is writing.
While this book may be viewed as an introduction to modeling, my guess is even experienced modellers will benefit from reading it - even if only a quick skim. There are almost certainly going to be a few techniques of which one is unaware that will make one go "Ah, that's a good idea!" and that will likely save time and frustration. There is value in this book for many levels.
For one new to this subject, one may be surprised at how much of modelling - and the book - is based around Excel. In the financial world, Excel is the giant when it comes to modelling. If one wants to learn financial modelling, one needs to learn Excel. The two can be considered inseperable and the author understands this. The plentiful advice given on using Excel should not be overlooked - even if it at times seems minor. Chances are the author included what he wrote with good reason and skipping over - or not fully paying attention - is inviting eventual peril.
Besides the use of Excel there is the substance of the book that one would expect. Income Statements, Balance Sheets, Cash Flow, Retained Earnings, Plugs, Revolvers, etc. These are explained in a way that even a complete novice to the field should be able to understand. Throughout the book there is a very logical flow in how concepts are taught. It's very confidence inspiring as one gets the feeling that a lot of time and thought went into developing this book.
After an introductory look at Excel and an overview of financial concepts, the reader is encouraged to build their own models with step-by-step instructions. I'd highly recommend spending the time doing so as this is where the most value for a novice will be gained. The hands-on work - inevitably making mistakes which one learns from - will allow one to see how the various parts of a model are connected and what's possible. The author has downloadable Excel files on his site of the examples in the book. I'd suggest just using those as references for one's own work. Simply glancing at those will not give the same rewards as actually building one's own models.
In the professional world, one occasionally comes across an expert whose experience and knowledge makes one think, "You really know a lot about this field. You should write a book and share what you've learned." "Building Financial Models" strongly gives the impression of being such a book.
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I used MS Office 2011 while going through the book which itself uses screenshots from Excel 2007. The differences between the images of the book and the current Excel are mostly superficial. Occasionally, it takes a small amount of time to track down the function needed. It's not a big problem.
However, using a Mac instead of Windows will be a nuisance as many of the time-saving keyboard shortcuts mentioned in the book are completely different or non-existent on a Mac. I'd highly encourage using Windows while going through this book.
The second edition is an outstanding primer on building models. The book is both for college students and senior finance professionals with or without excel experience. The book does a great job of explaining excel functions and how to use excel. The book guides you through building a model which can balance through both the balance sheet and or the statement of cash flow, which is fantastic and no other modeling book does. The photo shots of the excell sheets and the formulas used is a huge help in seeing the big picture. The author does a superb job of explaining the cash and debt sweep scenarios ( a most complicated excel topic) and lays it out in a manner that is easy to understand. This is a must have book for every person that is learning to build models.
Product Details :
Hardcover: 464 pages
Publisher: McGraw-Hill; 2 edition (May 27, 2009)
Language: English
ISBN-10: 0071608893
ISBN-13: 978-0071608893
Product Dimensions: 6.3 x 1.1 x 9.2 inches
More Details about Building Financial Models 2nd edition
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