Who is a Financial Modeling Consultant?
Financial modeling consultants are individuals or firms that are hired by the businesses for performing certain financial modeling tasks such as budgeting & forecasting, mergers & acquisition, raising capital, and other important financial tasks. These consultants are majorly hired by small businesses since they don’t have separate finance planning and analysis teams that could otherwise develop the financial models and execute or analyze them for the business.
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It is expected to perform the following functions:
- Building different financial models based on historical data of a business and providing forecasts based on the analysis of historical data as well as industry metrics.
- Carry out a scenario analysis to determine the risk that a business might be exposed to, based on different factors.
- Ensuring implementation of processes to improve budget and preparation of the company’s forecasts.
- Identifying the risks faced by a business, both financial and non-financial, and curate a mitigation strategy for the same.
- To update the financial models as and when required at different time periods.
- Carry out company valuationsCompany ValuationsDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company., capital structure studyCapital Structure StudyCapital Structure is the composition of company’s sources of funds, which is a mix of owner’s capital (equity) and loan (debt) from outsiders and is used to finance its overall operations and investment activities., and comparable companies analysisComparable Companies AnalysisComparable comps are nothing but identifying relative valuations like an expert to find the firm's fair value. The comparable comp process starts with identifying the comparable companies, then selecting the right valuation tools, and finally preparing a table that can provide easy inferences about the fair valuation of the industry and the company..
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Who Hires Financial Modeling Consultant?
Top companies and business houses hire financial modeling consultants to handle their budgets & forecasts, mergers & acquisitions, capital raising, and other financial transactions. In comparison, some companies might be having internal employees in their financial planning and analysis team who act as a consultant for them. Other companies might hire the financial modeling consultants from outside the nature of their profession since they might not be having a separate financial planning and analysis team.
If you are planning to become a consultant, you must know what the career path for a person entering the financial planning & analysis (FP&A) domain is.
- The first step is to become an FP&A analyst. For this, you need to have an undergraduate degree in the accounting field and working experience of one to three years in accounting or finance.
- To become a senior FP&A analyst, you need to get an MBA degree in your portfolio and experience of three to five years.
- As you work and progress, you can get promoted as FP&A manager once you have gained an experience of about five to ten years.
- Finally, you can become an FP&A director after you prove your worth and hold an experience of more than ten years.
The salaries drawn by financial modeling consultants depend on the level at which they are working. The average salaries drawn by working at different levels are discussed as follows:
- FP&A: $50,000 to $70,000
- FP&A Senior Analyst: $65,000 to $85,000
- FP&A Manager: $85,000 to $115,000
- Director FP&A: $100,000 to $250,000
- Raising funds for different projects and deciding the source of fund, i.e. debt vs equityDebt Vs EquityDebt refers to the source of money raised from loans on which the interest is required to be paid. Thus it is a form of becoming creditors of lenders, whereas equity means raising money by issuing shares of a company. Shareholders get returns on such shares from the company's profit in the form of dividends..
- Deciding the merger and acquisition deals
- Budgeting and forecasting
- Cost-benefit analysisCost-benefit AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc. for any new project or activity to be undertaken
- Valuation of stocks and other securities
Financial Modeling Consulting Firms
Financial modeling consulting firms are those organizations involved in providing services relating to financial modeling and necessary consultation. These firms build up Excel-based tools for their clients which helps in forecasting the future performance of the clients. In preparing such forecasts, the firms take into account the historical performance of the client, industry trends, and some assumptions. The firm prepares the forecasted balance sheet, income statement, and cash flow statement (commonly known as 3 statement model3 Statement ModelA 3 statement model is a type of financial modeling that connects three key financial statements: income statements, balance sheets, and cash flow statements. It prepares a dynamically linked single economic model used as the base of complex financial models like leverage buyout, discounted cash flow, merger models, and other financial models.) ) for its client. Afterwards, a number of financial models are developed, such as the discounted cash flow model, leveraged-buyout model, mergers & acquisitions model, and so on. These financial models are beneficial for the clients in making key financial decisions.
This has been a guide to financial modeling consultants. Here we discuss their responsibilities, career path, services, firms and salaries offered. You can learn more about finance from the following articles –