When it comes to building a financial model there are many trade-offs between using Excel and financial modeling software. The debate continues to persist as to whether financial analysts should continue to use Excel or permanently migrate to some type of financial modeling software.
Using Excel is a totally customized way of building a model from scratch and can handle any type of layout, structure, calculations, or format you want. It is, however, prone to errors.
Financial modeling software offers the structure and error prevention we all want in our analysis but at the cost of not being able to accommodate attributes that are specific to a company or an asset.
Excel is the ultimate way to understand a business
When it comes to understanding a business and a piece of financial analysis, no type of software can ever replace Excel. This is because going through the painstaking steps of calculating everything about a business yourself really helps you understand it.
Imagine a type of software that automatically takes a company’s financial statements, forecast, and capital structure, then automatically spits out an NPV. This would save you a lot of time, but would not teach you anything about the business.
It’s the unfortunate truth that building a financial model from the bottom up in Excel is the best way to really understand a business or an investment opportunity.
Visit the template section to see different ways of utilizing Excel to model financials.
After you’ve built the model in Excel, it may make sense to use risk management software for running Monte Carlo analysis or other types of risk and sensitivity analysis.
A software called @Risk (“at risk”) by Palisade is a powerful way of performing risk analysis using Monte Carlo simulations. Given how hard (or near impossible) it is to do this in Excel on its own, it makes sense to incorporate something like @Risk.
Software options currently available
Financial modeling software solutions currently available in the marketplace include: