How to Learn Financial Modeling: The Cyberpunk, the Witcher, and the Wardrobe

Many people say that if you want to “learn financial modeling,” you should pick a company you’re interested in and try to build a financial model for it.

For example, I am a huge fan of CD Projekt Red’s video games, such as The Witcher 3 and Cyberpunk 2077:

So, if I wanted to learn financial modeling, people might recommend that I download CDPR’s filings and presentations, open an Excel sheet, and start building a model based on assumptions such as:

• When will The Witcher 4 come out?
• How much will it cost to develop, and how many copies will it sell?
• Will there be DLC or a subscription service?

The problem is that this advice is misguided, and modeling a company like CDPR – even though I love their games – is not a good way to learn financial modeling.

The main issue is that many of these “fun companies” (e.g., in games and media) have unpredictable revenue streams that are difficult to forecast:

You’re much better off learning financial modeling based on simple, boring companies with easier-to-predict revenue, expense, and cash flow line items.

A good example is Walmart from our DCF modeling tutorial; a company like Otis (elevator manufacturer) in our 3-statement modeling tutorial could also work.

Also, it’s critical to watch someone else build a few models first, understand the process, and then try building your own models from templates.

Once you’ve mastered these steps, you can move on to more open-ended models.

Files & Resources:

• How to Learn Financial Modeling – Slides (PDF)
• Walmart – Financial Statement Excerpts (PDF)
• Warner Brothers – Financial Statements Excerpts (PDF)

How to Learn Financial Modeling, Part 1: Watch and Imitate

We disagree with the advice that you should just download a company’s filings and presentations and start typing away in Excel.

Before doing that, you should review at least 3-4 examples of someone building a financial model, such as 3-statement projections.

Our courses have many, many examples of this, but you could also use books or even our free tutorials.

The most important points are:

1. To understand the purpose of the model (e.g., To value the company? Estimate its financing needs? Something else?).
2. To understand the logic of each step in the process. For example, why do you typically save the Interest Income and Expense projections until the end? Why are Working Capital items such as Accounts Receivable linked to Income Statement lines such as Revenue?

Focus on the revenue, expense, and cash flow projections in this step.

Yes, other topics will come up in interviews, but you really need to understand these fundamentals before moving into merger models, M&A models, or even basic valuation.

One Final Note: If you don’t feel confident in your accounting knowledge, you may need to do a quick review before you attempt to project the financial statements.

Accounting is a bit different from financial modeling, but all modeling requires at least some accounting knowledge – so you should take the time to learn about the three statements and how they link together (we have tutorials on the Income Statement, Balance Sheet, and Cash Flow Statement).

AccountingCoach.com is a good source for learning about specific line items:

How to Learn Financial Modeling, Part 2: Practice with Templates and Case Studies

Once you’ve watched someone build a model or read through the entire process, it’s time to practice yourself.

At this stage, you should stick to “partial templates,” such as Excel files that have the line items and historical data entered but nothing for the projections:

You want to test your ability to link different items and make reasonable forecasts for growth rates, margins, unit sales, and employee counts.

So, in this step, you want to practice case studies with the following qualities:

1) Open-Ended Instructions – They should not tell you exactly “how” to project each line item or what growth rates or margins to use. They should require your judgment:

2) Unit-Level Forecasts – You should find case studies that require more than simple percentage growth and margin forecasts. For example, revenue might be based on Units Sold * Average Selling Price or # Locations * Sales per Location. The expenses and cash flows should also be tied to these separate drivers somehow.

For example, retail companies need to spend more on Capital Expenditures (CapEx) to open brand-new locations than to maintain existing ones.

If you’re modeling simple percentages rather than going to the unit or location level, you could easily make implausible assumptions.

The models you build in this stage should not be that complex.

In fact, it’s counterproductive if your Balance Sheet has 25 separate line items or your Cash Flow Statement has dozens of different lines.

You want simple financial statements, with most of your time and effort put into forming the appropriate revenue, expense, and cash flow assumptions.

If you see a case study with complex statements, run!

Find something else with simplified/consolidated statements so you can focus on the big picture.

How to Learn Financial Modeling, Part 3: Practice Without a Template

Once you’ve practiced with a few templates and case studies (perhaps 2 – 3, depending on your time and skill level), it’s time to try a more open-ended case study.

We have an example of this for Otis, an elevator manufacturer.

Focus on companies with simple, straightforward financial statements.

A few criteria in order of “most to least important” include:

1. Simple Financial Statements – You don’t want companies with 30 line items on the BS or CFS. Search for companies in tech, consumer/retail, industrials, services, or healthcare with ~10 line items or less on each side of the Balance Sheet.
2. Pure-Play Business with Clear Drivers – If something is more complicated than 2 – 3 key revenue drivers, it’s not a great example to learn from. We like retail companies because revenue equals # Locations * Sales per Location or # Square Feet * Sales per Square Foot. Avoid companies with multiple different business lines, especially if they’re unrelated.
3. Good Investor Presentations – These presentations should disclose key data about the company’s market, unit sales, utilization rates, and pricing. You ideally want companies whose presentation data can be fed directly into your financial model.

As a specific example, let’s say you’re considering using Walmart or Warner Brothers for your open-ended model.

By looking at Warner Brothers’ Income Statement for 5 seconds, you can tell it will be more difficult to model:

You might still want to model Warner Brothers in the future, but as a starting point, Walmart is a better option.

We recommend completing at least 2 examples of these open-ended models for companies in different industries.

There’s no way to check if you’re “correct” without having someone else review your model…

…but one simple method is to cross-check your revenue, net income, and EPS estimates with consensus forecasts for the company.

For example, go to Yahoo Finance and see how your numbers over the next few years compare:

Your model is not necessarily “wrong” if your estimates are different – but in this stage of the learning process, you should aim for similar forecasts.

How to Learn Financial Modeling, Part 4: Practice with More Complex Industries and Companies

Once you feel comfortable with basic revenue, expense, and 3-statement forecasts for “standard” companies, you can move into more challenging scenarios.

The starting point should be companies with “messier” financial statements, as this is a common real-world occurrence on the job.

We have a separate tutorial on how to consolidate the financial statements in these cases, but here are our overall guidelines:

• Income Statement: You should not change too much here; if the company has too many different revenue or expense lines, perhaps consolidate them down to 1 – 2 major ones and an “Other” category for everything else.
• Balance Sheet: Aim for 5 – 10 items on each side and combine “Short-Term” and “Long-Term” versions of items like Debt, Deferred Revenue, Investments, etc. Create a single “Net” Deferred Tax Liability and show Common Shareholders’ Equity or Owners’ Equity as a single line.
• Cash Flow Statement: Cash Flow from Operations should start with Net Income, add back D&A, have a Deferred Tax line item, and have maybe 1 – 2 other items, including smaller ones that you put in an “Other” category. Make the Change in Working Capital section match your simplified Balance Sheet. Cash Flow from Investing should consist of CapEx and perhaps 1 – 2 other lines for Investments, Acquisitions, or Intangibles. Cash Flow from Financing should consist of Stock Issuances/Repurchases, Debt Issuances/Repayments, and Dividends, with an “Other” line item to consolidate the rest.

One approach is to look at an “idealized” version of a 3-statement model, compare it to your company’s, and keep consolidating until it more closely resembles that version.

Learning different industries depends on the types of investment banking groups, companies, or teams you plan to apply to.

For something like FIG (commercial banks and insurance), you will probably need specialized training because of the vast differences.

In areas like power & utilities, you can probably learn some key points and simply extend your knowledge of modeling concepts.

How Well Do You Need to “Learn Financial Modeling?” Is it Necessary for Interviews?

We’ll conclude this article by addressing a common criticism leveled at trainers and financial modeling providers.

Many people argue that it’s “pointless” to learn financial modeling, especially for entry-level investment banking interviews, because you’ll never have to complete a modeling test in interviews.

They argue that you should save this process until you win an internship or full-time job and then spend time learning financial modeling in the months before you start.

They’re half right.

It’s true that, at least in the U.S., you’ll rarely have to build a real financial model in an entry-level interview.

However, that’s not the main reason to learn financial modeling.

The main reason to learn financial modeling is to understand the concepts that will come up in technical interview questions.

For example, if you get a question about how Accounts Receivable going up by $100 changes the financial statements, you will be able to answer far more effectively if you’ve built models that use Accounts Receivable.

The same applies to dozens of other concepts, ranging from how to calculate Unlevered Free Cash Flow to how to calculate metrics such as ROA, ROE, and ROIC.

The point is that you learn best by doing.

That said, you do not need to follow the steps above just to prepare for interviews.

The step-by-step process here is more of an “on-the-job prep plan.”

For interviews, we’d recommend the following:

1. Accounting – Know the 3 financial statements and how they link together.
2. 3-Statement Models – Watch 1 – 2 examples and practice one case study independently.
3. Valuation/DCF – Do the same, but keep it easy and stick to simple cash flow forecasts rather than full 3-statement models.
4. Merger Model – Focus on basic EPS accretion/dilution examples and go through a few exercises related to these.
5. LBO Model – Focus on simple LBO models (30 – 60 minutes). You don’t need more than this unless you interview for private equity jobs (and sometimes corporate development and other buy-side roles).

This list is more of a set of recommendations for “interview prep” rather than “how to learn financial modeling.”

So, we’ll take that as a sign to wrap up and leave you with these options for learning – whether you care mostly about interviews or you’re more focused on internship/job prep.