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Book Review: Building Financial Models

John S. Tjia’s Building Financial Models (2009, McGraw-Hill) is a comprehensive guide for designing, building, and implementing valuation projection models. It provides an overview of projection models, an in-depth explanation of the accounting and financial concepts that underpin financial models, step-by-step directions for using excel to create financial models, and a section on the principles of good forecasting. The book does not provide any information on how to model different industries; rather, it provides a detailed overview of a general financial model.
 
The book starts off by walking the reader through an overview of financial modeling best practices, accounting concepts, and necessary excel functions. It then provides readers with directions for building a fully functional integrated financial model that links the balance sheet, income statement, and cash flow statement. In addition, the book addresses iterative calculations, balancing plugs (setting the model to increase funding requirements via debt or equity and/or using the cash sweep to repay debt, pay dividends, or repurchase shares), and other areas that can challenge analysts. New additions to the 2nd edition include an overview of discounted cash flow modeling and financial model templates available on the author’s website. For the analyst looking to develop their Visual Basic skills, the book even includes a primer chapter towards the end of the book.
 
The two keys to building an effective projection model are to (1) building a model with an intuitive, easy to use layout, and (2) applying reasonable assumptions to your forecasts. With the help of John Tjia’s Building Financial Models, at least one of these two keys is taken care of. While I found some of the detail provided a little unnecessary, I believe the book was geared towards a reader with less financial modeling experience. In sum, I would recommend this book for beginners looking to develop financial modeling skills and for intermediate-level analysts looking to hone their craft.  For an analyst looking to learn how to model a specific industry, I would consider looking elsewhere.