The term “Financial Modelling” usually means integrated planning of a company’s financial outlook – in practice, this is mostly done with Microsoft Excel. This book by K. Scott Proctor is a good introduction, but requires the reader to know quite a bit about accounting.
The book follows a sensible structure: First, the author explains how different inputs in a financial model work together. The central focus is on financial plans that the author summarises as the “master budget”. In principle, the master budget answers questions like: How many units of which product will we sell at which price? Which investment costs will occur? How will the inventory develop? The author uses detailed templates to show what this could look like in Excel.
Money makes the financial model go round
Based on these plans, the profit & loss statement, balance sheet and cash flow statement are forecast – just like in a quarterly or annual report. Additionally, the author presents analyses that are typically used in financial models, such as a sensitivity analysis (what would happen if certain inputs were different?) or corporate valuations based on DCF (discounted cash flows) or multiples. Not every analysis is useful in every context – but the reader receives a very good overview of what is often done, and can adjust that accordingly.
Not all common best practices are always followed
Advanced readers will quickly notice that Proctor keeps his financial models simple, but sometimes at the price at long established financial modeling best practices. For instance, he uses many range name definitions instead of cell references. While that may be okay in examples with merely 4 planning periods, working like that could easily lead to mistakes or inconsistencies in larger models.
Rough around the edges
One very negative aspect of “Building Financial Models with Microsoft Excel” is the very unpractical hard-cover binding. It is almost impossible to comfortably follow the step-by-step instructions while working with the computer. At least, all examples can be found on a CD-ROM that comes with the book – in separate versions for each and every step shown in the book. That is a great help for orientation.
Aspiring readers should be aware of the fact that this book focuses on US-GAAP, and hence all examples are in accordance with it. It is close enough to IFRS rules, but international readers may want to note that some of the financial statements would not be in accordance with their local GAAP.
Conclusion: A good financial modeling book for beginners – but some best practices are ignored.
K. Scott Proctor: Building Financial Models with Microsoft Excel
John Wiley & Sons (2nd edition, January 2010)