Building a financial model should not begin with opening Excel and entering formulas. Before creating projections, it is useful to understand the company, its business model, industry and historical financial performance.
This initial analysis provides context for the assumptions used later in the model. For learners taking a Financial Modelling Course, learning how to research a company before modelling it can improve the overall quality of their financial analysis.
Why Company Analysis Comes First
A financial model represents a business using numbers.
If the learner does not understand how the business makes money, it becomes difficult to decide which assumptions are reasonable.
For example, a company may generate revenue through:
Product sales
Subscription fees
Advertising
Services
Licensing
Each business model can require a different forecasting approach.
Understand the Business Model
Start by answering a few basic questions:
What does the company sell?
Who are its customers?
How does it generate revenue?
What are its major costs?
What markets does it operate in?
What factors influence demand?
These questions provide the foundation for financial analysis.
Study the Industry
Company performance is often influenced by industry conditions.
Learners can examine:
Market growth
Competition
Customer demand
Regulations
Technology
Input costs
Industry cycles
For example, a company operating in a cyclical industry may experience very different revenue patterns compared with a subscription-based business.
Read the Annual Report
Annual reports can provide valuable information for financial modelling.
Students can look for:
Historical financial statements
Revenue breakdown
Business segments
Management discussion
Risks
Capital expenditure
Debt
Accounting policies
The objective is to understand the business rather than simply collect numbers.
Analyse Revenue Drivers
Revenue should ideally be linked to business drivers.
For example, a hotel business might be analysed using:
Number of Rooms × Occupancy × Average Daily Rate
A subscription company might use:
Customers × Average Revenue per Customer
A manufacturing company may use:
Units Sold × Average Selling Price
The appropriate driver depends on the business.
Analyse Cost Drivers
Costs should also be understood.
Some costs may change directly with revenue, while others may remain relatively fixed.
For example:
Variable Costs: Raw materials, commissions, shipping
Fixed Costs: Certain administrative expenses, rent and salaries
Understanding cost behaviour can help create more meaningful assumptions.
Review Historical Financial Performance
Before forecasting, examine several years of historical performance.
Look at:
Revenue growth
Gross margins
Operating margins
Net profit
Cash flow
Debt
Capital expenditure
The goal is to identify trends and unusual changes.
Look for One-Time Items
Historical financial statements may contain unusual or non-recurring items.
For example:
Restructuring expenses
Asset sales
Major legal costs
Acquisition-related expenses
These items may need to be considered carefully when using historical performance to build future assumptions.
Analyse Cash Flow
Profitability does not provide the complete financial picture.
Students should also examine:
Operating cash flow
Capital expenditure
Free cash flow
Working capital
Cash-flow analysis can help determine whether accounting profits are translating into cash generation.
Understand Capital Structure
Debt and equity can influence financial performance.
A company with significant debt may have substantial interest expenses.
Students can examine:
Total debt
Cash
Debt maturity
Interest expense
Leverage ratios
These factors can become important when forecasting future financial performance.
Turning Research Into Model Assumptions
After completing company analysis, the learner can convert findings into assumptions.
For example:
Industry Growth → Revenue Growth Assumption
Historical Margin → Operating Margin Assumption
Customer Collection Pattern → Receivable Assumption
Expansion Plans → Capital Expenditure Assumption
This creates a logical connection between research and modelling.
How a Financial Modelling Course Can Help
A practical Financial Modelling Course can teach learners to follow a structured process:
Company Research → Historical Analysis → Business Drivers → Assumptions → Financial Model → Forecasts
This is more useful than simply teaching spreadsheet formulas in isolation.
Practical Company Analysis Exercise
A learner can select a listed company and create a short pre-modelling report.
It can include:
Business overview
Industry overview
Revenue drivers
Cost structure
Historical financial performance
Working capital
Debt position
Capital expenditure
Growth opportunities
Key risks
The information can then be used to create a financial model.
Common Mistakes
Starting With Formulas
Understanding the business should come first.
Using Generic Assumptions
Assumptions should reflect the company's business model where possible.
Ignoring Industry Conditions
External factors can affect company performance.
Looking Only at Revenue
Profitability and cash flow are equally important.
Final Thoughts
A Financial Modelling Course that combines company research, financial statement analysis and practical modelling can help students understand both the numbers and the business behind them.
