As Microsoft training experts, many of our clients come from the finance industry, accounting, and business backgrounds. As such, mastering Excel is not only helpful for productivity but instrumental for their success. One of the main use cases for spreadsheets from these clients is financial modelling, a corporate finance concept.

Simply put, financial modelling uses numbers to forecast outcomes and guide smarter business decisions. When accurate, these models can make all the difference, and Excel remains the ultimate tool for the job. This guide will show you how to build, structure, and interpret financial models using Microsoft Excel to set you up for business success.

What Is Financial Modelling?

Financial modelling is a way of applying corporate finance concepts by creating a structured, mathematical representation of a real-world financial situation using spreadsheets. Using Microsoft Excel, financial models can be created to forecast a business’s future performance based on historical data, assumptions, and scenarios.

A wide range of professionals use Microsoft Excel for business and financial modelling, all of whom we train here at Priority Management. These include financial analysts, accountants, business owners, CFOs, investors and other finance professionals. They rely on these models to make informed decisions for things like:

  • Business budgeting
  • Corporate finance
  • Investments
  • Valuations
  • Business growth
  • Mergers and acquisitions
  • Sales forecasts

There are several different types of financial models depending on the objective, some of the ones are:

  1. 3-Statement Models: Integrate the income statement, balance sheet, and cash flow statement into one dynamic model. This is used by a wide range of professionals.
  2. Discounted Cash Flow (DCF) Models: Estimate a company’s value based on its expected future cash flows and financial performance. Financial analysts use DCF for stock reports.
  3. Leveraged Buyout (LBO) Models: Analyse the feasibility and profitability of acquiring a business. Widely used for mergers and acquisitions, primarily with borrowed funds.

Each model type serves a different purpose, but with the common aim of improving financial decision-making from data-driven insights.

Why Excel is Ideal for Financial Modelling

Microsoft Excel remains the go-to for financial modelling because of its flexibility, formulas and universal familiarity across industries. It offers powerful built-in functions specifically designed for data analysis and forecasting, as well as being able to compute complex mathematical calculations. As a result, Excel is ideal for building customised models to suit the use case.

Besides its features, the integration capabilities of Excel have evolved significantly over time. Originally, Excel was a standalone tool focused on manual data entry and simple calculations. However, as it has become more central to financial planning and business operations over the years, Microsoft updated Excel to easily integrate with external databases and financial software, such as Salesforce, SAP, and financial reporting systems.

Getting Started: Essential Excel Skills for Modelling

Before building financial models, it’s important to have a strong foundation in Excel. Once you’ve mastered the basics, here are some of the more advanced skills required for financial models.

INDEX/MATCH

INDEX returns a value from a specified row and column within a range, while MATCH finds the position of a value in a column or row. Used together, they create a reliable lookup function. For example, you might use INDEX/MATCH to look up a specific employee’s salary from a list of employees in a payroll model.

You can apply INDEX/MATCH by:

  1. Navigating to the Formula Bar.
  2. Click on the cell where you want the result of the formula to appear.
  3. In the Formula Bar (located just above the spreadsheet), you can manually type in the formula, or you can use the Insert Function option.

IF Statements

These are popular for decision-making within a model based on specific conditions (e.g., return a specific value if a condition is met). A use case for an IF statement could be to calculate different tax rates based on income brackets.

Steps to apply IF Statements:

  1. Click on the cell where you want the result of the IF statement to appear.
  2. Open the Formula Bar (located above the spreadsheet) and either start typing directly or click the fx button next to the formula bar to use the Insert Function feature.
  3. Write the IF statement and press Enter. The basic syntax of an IF statement is: =IF(logical_test, value_if_true, value_if_false)

SUMIFS

This is a powerful function to sum data based on multiple criteria. For example, you might calculate total sales revenue for a specific product category across multiple regions and time periods.

Steps to Use SUMIFS:

  1. Click on the cell where you want the sum result to appear.
  2. Open the Formula Bar and either start typing directly or click the fx button next to the formula bar to use the Insert Function feature.
  3. Enter the SUMIFS formula. The basic syntax of the SUMIFS function is: =SUMIFS(sum_range, criteria_range1, criteria1, [criteria_range2], [criteria2], …)

Data Validation

Data validation helps you control what data can be entered into a cell. It reduces errors and ensures consistency.

Steps to Use Data Validation:

  1. Click on the cell or select the range of cells where you want to apply data validation.
  2. On the Excel ribbon, click on the Data tab.
  3. In the Data Tools group, click on the Data Validation button. This opens the Data Validation dialog box.
  4. In the dialog box, you can choose the type of validation (e.g., whole numbers, dates, list, text length). For example, to restrict input to a specific list, select List under the Allow dropdown, and then specify the list of values (e.g., “North, South, East, West”).
  5. Optional, but you can customise error messages to alert users when they enter invalid data. Under the Error Alert tab, check Show error alert after invalid data is entered, then set a custom error message.
  6. Press OK.

Error Checking

Excel has built-in error-checking tools to automatically flag common formula-based errors.

Steps to Use Error Checking:

  1. On the Excel ribbon, click on the Formulas tab.
  2. In the Formula Auditing group, click on Error Checking. This opens a dialog box that will scan your spreadsheet for potential issues, like #DIV/0! or #VALUE! errors.
  3. Review Errors – If there are any errors in your worksheet, Excel will highlight them and allow you to go to each error for review. You can fix errors by clicking Next to navigate through them.

Formatting, Layout, and Structure Best Practices

Use clear headings and labels for key sections like “Revenue,” “Expenses,” or “Net Profit,” and use bold text and larger font sizes. You can further enhance the structure by applying subtle background colours, such as light grey, to these headings to visually separate different sections of the model. And it’s always visually appealing to centre-align titles and headers to ensure they stand out and maintain consistency throughout the sheet.

It’s important to create a logical structure in your financial model by organising the sections sequentially: begin with inputs (assumptions), followed by calculations, and end with outputs (results). For more complex models, consider using separate sheets for different sections, and be sure to label each sheet clearly.

Step-by-Step: Building a Simple Financial Model

While financial modelling varies depending on the use case, here’s a step-by-step guide to creating your own structured model using Microsoft Excel:

1. Set Up Inputs

Begin by entering raw data such as historical revenue, units sold, or costs across the header column. Don’t forget to colour the column differently and centre-align the text. These are the variables that drive your model.

2. Define Assumptions

Add key assumptions like growth rates, tax percentages, and discount rates. Keep these in a separate section or tab for easy reference and updates.

3. Build Calculations

This is where formulas such as IF, SUMIFS and INDEX/MATCH come into play. It’s time to connect your inputs and assumptions to calculated metrics like gross profit, net income, and cash flow.

4. Structure Outputs

Present your results in a clear summary area showing final figures such as EBITDA, net profit, and ROI. This will be used for your reporting and/or decision-making.

5. Link Financial Statements

For more advanced models, connect your income statement, balance sheet, and cash flow statement. As a result, they will update automatically based on your input and calculations.

6. Run Sensitivity Analysis

Test, test, test. See how changes in key variables (e.g. sales volume or cost assumptions) affect your outputs. This is where you can identify risks and guide better business decisions.

Common Mistakes to Avoid

Here are the three most common mistakes we see learners making when learning to model in Excel.

1. Overcomplicating the Model

Trying to do too much too early can make your model messy and hard to update. Keep it simple. Practice baby steps and save the treasury and marketing functions for later models.

2. Lack of Transparency and Documentation

If someone else can’t follow your logic, it’s a problem. Remember our structuring and formatting tips—use comments, clear labels, and a logical layout to make the model understandable at a glance.

3. Hardcoded Numbers Instead of Linked References

Entering values directly into formulas makes your model harder to audit and update. Wherever possible, link formulas to input cells instead of typing numbers manually.

Tips for Improving Model Accuracy and Readability

We’ve already touched on a few of these, but they’re worth repeating because they make a real difference when reviewing or presenting your financial models:

Colour-Coding Cells

Use a consistent colour scheme. For example, use blue for inputs, black for formulas, and grey for headers, to quickly identify different cell types and improve navigation.

Audit Tools

Excel’s built-in features like Trace Dependents, Trace Precedents, and Error Checking help you spot issues and understand how data flows through your model.

Named Ranges

Assign meaningful names to important cell ranges (e.g., Revenue_Growth, Operating_Costs) so formulas are easier to read and manage.

Tables

You can also convert raw data into Excel Tables to benefit from structured references. To do this, use Insert > Table. It’s also handy for auto-expanding ranges and better formatting control.

Advanced Features to Level Up Your Models

Once you’ve mastered a basic financial model, Excel offers a range of more advanced tools that can help you take your financial modelling to the next level. Here are a few to aim for.

Scenario Analysis Using Data Tables

Use one-variable or two-variable data tables to see how changes in inputs impact your bottom line. These could be variables such as revenue growth or discount rates.

This is great for stress-testing and comparing best/worst-case scenarios.

Macros and Automation Basics

A macro in Excel is a recorded set of actions that can be played back to automate repetitive tasks. Therefore, you can record macros to automate repetitive tasks such as formatting, updating inputs, or generating reports. This will save you hours on recurring monthly or quarterly updates.

Goal Seek

Goal Seek is useful for simple ‘what-if analysis involving output and input. It lets you work backward by setting a desired result and figuring out the input needed to achieve it. For example, you can use it to find what sales figures are required to reach a target profit.

Solver

Solver is a more advanced tool that finds the optimal solution by changing multiple variables within defined limits. It’s ideal for complex problems like maximising profit while staying under a specific cost or resource constraint. Solver is an add-in and must be enabled in classic Excel first. We suggest waiting until you’ve mastered the basics before applying Solver.

Start Getting the Most from Excel Today

In short, mastering financial modelling with MS Excel will empower you to make smarter business decisions by presenting data clearly.

If you’re ready to sharpen your skills and work more confidently with numbers, register for a Microsoft Excel training course with Priority Management, your trusted leaders in workspace solutions. Designed for students and busy professionals alike, it’s your next step to Excel (and business) mastery.

Frequently Asked Questions

Can you use Excel for financial modelling?

Yes, Excel is one of the most commonly used tools for creating financial models due to its flexibility and powerful functions. Financial modelling helps managers with financial data management.

What is the best practice for financial modelling in Excel?

The best financial modelling process includes organising inputs, calculations, and outputs clearly, avoiding hardcoding, and documenting assumptions throughout the model.

How long does it take to learn financial modelling on Excel?

It typically takes a few weeks to learn the basics, but mastering more advanced techniques can take several months of consistent practice.