5 Reasons Accountants (CPAs) Should Know Financial Modeling

Financial modeling is one of the most sought after skills in the world of finance.

In practice, financial modeling combines historical accounting and traditional finance skills to provide a representation of a particular company. By discounting future cash flows using flexible assumptions, financial professionals can “model” various scenarios. Adjusting the model inputs and viewing the potential outputs can help decision-makers make strategic determinations.

Traditional uses of financial modeling

A wide variety of groups and specialties employ financial modeling.

Models help corporate executives understand the return of a potential project or venture. Investment bankers and private equity associates model businesses as part of their due diligence procedures or marketing for a potential sale.

Valuation analysts provide opinions on the fair value intangibles and other assets based on DCF models. Further, models provide a basis for transaction opinions on potential mergers and acquisitions. For lenders, a financial model can paint a picture of the likelihood of default under various scenarios.

Even in the corporate environment, Financial Planning & Analysis (FP&A) analysts use models. The FP&A group models revenue projections, expenses, EBITDA, capital expenditures, and ultimately net income. Often, these figures are used to provide guidance for the investment community. Then, equity analysts update their own models with these inputs to determine if a security is a “buy, hold, or sell.”

Clearly, financial modeling is heavily used throughout a variety of finance disciplines!

So, why should accountants understand financial modeling?

Combining traditional finance skills with accounting expertise can offer a powerful combination that sets you apart for employers.

As a CPA or experienced accountant, you have in-depth understanding of the “language of business.” Knowledge of Generally Accepted Accounting Principles (GAAP), financial reporting, and tax regulation will always be a skill-set in demand by employers (especially, publicly-traded companies).

However, while you probably took several finance classes in college, most traditional accounting roles do not provide the opportunity to exercise these disciplines. Instead, accountants spend most of their day researching how to treat certain transactions. They book debits and credits, and compile reconciliations and variance analysis. All of this work helps ensure the financials are materially correct.

Rarely are accountants (outside of the C-suite) involved in making strategic decisions or providing meaningful analysis. However, by gaining skills in financial analysis and modeling assumptions, you can land a role that provides growth beyond the historical financials.

1. Financial modeling requires you to sharpen your Excel skills

Outside of specialized reporting software (Oracle, SAP), most of a CPA’s work is done in Excel. Microsoft Excel is a powerful software tool that allows for unparalleled flexibility in manipulating and analyzing data.

However, many accountants rarely go beyond the basic functions Excel offers.

While you probably have a basic understanding of the functionality of Excel, chances are you’ve never had formal training on how to leverage Excel. With a little knowledge and experience, you can gain INCREDIBLE efficiencies in your work. By learning financial modeling, you’ll also gain intermediate and advanced Excel skills.

You’ll learn how to quickly categorize and select data for whatever project you’re assigned.

A good course on financial modeling will teach you how to master pivot and data tables. You’ll learn to utilize functions beyond SUM and SUMIF. Implementing functions such as VLOOKUP, INDEX MATCH, and INDEX MATCH MATCH opens up a whole new world in your analysis. Finally, ensuring your Excel sheets utilize logical flows by following best practices are sure to impress your boss.

Even if your work never calls for the preparation of a financial model, learning to navigate Excel like a professional modeler can help you tremendously in your normal work product. More than likely, you’ll learn valuable Excel tips and tricks.

This knowledge can be applied to allow you to finish your work in record time!

2. Financial models are also used for accounting purposes

Financial models are valuable tools also used in corporate accounting for financial reporting purposes.

In business combinations, CPAs are required to fair value the acquired entity. With purchase accounting, the fair value of the acquired entity’s assets and liabilities are recorded on the acquirer’s balance sheet. Further, any intangible assets must be valued based on their discounted future cash flows. Models are used to quantitatively assess fair value.

Similarly, accountants and valuation professionals must model cash flows for assets that may no longer produce enough cash flow to cover their book value. In the event the underperforming assets no longer produce net cash flow sufficient to cover their book value, an impairment charge must be recorded.

Often, public accounting firms are engaged to help value acquired assets or calculate impairment charges.

Whether you prepare models in public accounting or at your company, financial models are necessary to assess fair value for reporting purposes.

3. Financial modeling strengthens and enhances your accounting acumen

As accountants and CPAs, we think we have a deep understanding of accounting.

Depending on your experience, that may be true.

However, most CPAs specialize in certain areas as their career progresses. You may focus on financial planning or investment advisory. Individual or corporate taxation could be your area of expertise. You may work at a Big 4 firm performing audit, valuation and transaction advisory, or due diligence. Alternatively, you could be working in a traditional corporate accounting function.

No matter your area of expertise, becoming a pro at modeling can enhance your understanding of financial accounting.

At its core, financial modeling relies on the interconnected relationship between the income statement, balance sheet, and statement of cash flows. From these building blocks, complexted models can be constructed. Often, accountants are too deep in the details to analyze how these are all connected.

By compiling a 3 Statement Model, you’ll become an expert on the relationship of the financial statements.

Sure, as an accountant, you may already understand that depreciation expense is deducted to arrive at net income. However, depreciation is added back in the statement of cash flows. An increase in accounts receivable year-over-year on the balance sheet results in a “cash outflow” on the cash flow.

Through financial modeling, you’ll not only enhance your knowledge on the relationship among the 3 financial statements, but you’ll also learn how to project financial data. Based on historical trends, you can reasonably project future revenues, expenses, and working capital charges. Then, you can use these assumptions to forecast future cash flows.

4. You can move beyond traditional accounting to providing meaningful analysis

As accountants, we spend most of our time looking in the rear view mirror.

We spend our work day documenting and recording transactions that occurred in the past month (or two). We prepare quarterly reports with information dated months prior. Then, we explain changes through variance analysis for executive management. In public accounting, CPAs spend sleepless nights auditing balances as of the report date that may no longer be meaningful (or relevant) for investors.

Clearly, most accounting roles focus heavily on determining and explaining historical results for reporting. As such, the skills we develop focus on past performance of the company rather than the future prospects.

Financial modeling provides an advanced set of analytical skills

Financial modelling provides an outlet to break the mold of the historical nature of accounting. Instead, you can combine accounting concepts and provide meaningful analysis for management.

With financial modeling, you’ll learn how to calculate and project EBITDA – a widely used metric in finance to gauge profitability. Further, financial modeling provides the opportunity to develop forecasting techniques by learning to forecast revenue, expenses and other items impacting cash flow. Then, you’ll learn techniques predominately used in finance to discount these future cash flows.

Using analytical skills to model different scenarios provides management the information they need to make the best decisions for the company. You can be a part of the team that makes that happen!

5. Land a role outside of the accounting world

Sick of all those debits and credits?

Accounting certainly isn’t for everyone. Often, the work is extremely detailed, requiring intense focus. Many people hate the office environment and corporate grind. The deadlines for quarterly and annual reporting are notoriously tight, leading many accountants to log 65+ hours a week. These working conditions make being a CPA extremely stressful.

Here are 5 Disadvantages of Being a CPA.

If you’re looking to make a career pivot, developing skills that help you analyze and project data to make strategic decisions can provide a path to a more finance-oriented career.

Often, careers in financial analysis can be much more interesting. Instead of simply recording what happened for financial reporting, you have the potential to influence the direction of the company. You can prepare Internal Rate of Return (IRR) models to help management decide where to best allocate capital. Your work can provide valuable insights as to how efficiently a company is operating. These findings can provide key areas ready for improvement and that will lead to increased profitably.

Further, careers in finance tend to be more lucrative. Can you get rich in accounting? Absolutely.

However, becoming a financial analyst and moving into a finance group or corporate development at your company can provide for much better pay. Advanced financial modeling is a “must have” for investment banking and private equity. While you’ll log even more hours, these careers can provide a quick path to six figure salaries.

Developing a strong acumen for financial modeling through education is the first step you should take to advance your career beyond your accounting-oriented role.