How Analysts Use Financial Models

The four people who live in spreadsheets

Financial modeling isn't an academic exercise — it's a daily working tool across finance. Knowing who uses models and why helps you understand the choices we'll make when building one. Four groups stand out.

Investment banking (IB) teams build models to advise on deals. When one company buys another (an "M&A" deal, short for mergers and acquisitions), bankers model the combined business to judge whether the price makes sense. These models also feed the "pitch books" used to win client work.

Equity research (ER) analysts forecast a public company's future earnings and translate that into a price target — their estimate of what a share should be worth. Investors read these notes before buying or selling a stock.

Corporate finance and FP&A (Financial Planning & Analysis) teams sit inside companies. They build budgets, plan next year's spending, and answer "can we afford this?" questions for management. Their models guide real operating decisions.

Founders and operators model their own businesses to plan growth, decide on hiring, and raise money from investors. A clear model is often what turns a pitch into a cheque.

What a model is built to decide

Across all four roles, a model exists to answer a decision. Should we buy this company? Is this stock cheap? Can we fund this expansion? The value of the model is not the spreadsheet itself — it's the better decision it enables. That's why we'll obsess over clarity and accuracy throughout the course.

Here is a worked taste of the kind of question a model answers. Suppose an analyst forecasts that a company's value will reach 1,610 (in millions) in five years, starting from 1,000 today. What yearly growth does that imply? Analysts use a measure called CAGR (compound annual growth rate), and in Excel it looks like this:

That returns about 10% — the smooth annual growth rate hiding inside those two numbers. You'll meet this exact formula again in the Excel section; for now, just notice that a model turns a vague idea ("it'll grow nicely") into a specific, checkable number.

A one-minute tour of the destination

The headline goal of this course is a three-statement model. That phrase just means a spreadsheet where the three core financial statements — the income statement, the balance sheet, and the cash flow statement — are wired together so a change in one flows automatically into the others. When it's done well, you change a single growth assumption and the whole model re-balances by itself.

What "integrated" means (in plain English)

Integrated means the statements are linked, not retyped. For example, the profit calculated on the income statement automatically increases the owners' equity on the balance sheet, and the cash generated flows into the cash balance. You build each link once, and the model keeps itself consistent. We'll do this step by step in Phase 2.

A weak model

Numbers are hard-typed, statements don't connect, and nobody can tell which cells are assumptions. Change one input and half the model breaks.

A strong model

Inputs are clearly coloured, statements link automatically, and a "balance check" row confirms it all ties. Change an input and the whole model updates cleanly.

Key terms