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Introduction to financial modeling
 

Introduction to financial modeling

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intro session on how to construct a fianncial model and common mistakes.

intro session on how to construct a fianncial model and common mistakes.

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Introduction to financial modeling Introduction to financial modeling Presentation Transcript

  • Introduction to Financial Modeling Copyright 2008, The World Bank Group. All Rights Reserved.
  • Static vs. Dynamic The “static approach” develops a set of key assumption that have one output, irrespective of whether it may or may not be realistically attainable. Copyright 2008, The World Bank Group. All Rights Reserved. 2
  • Static vs. Dynamic The dynamic approach assesses the interaction of all essential variables such as, technical, institutional and financial and derives a solution within the current political economy and that important trade-offs between objectives that may be in conflict. Copyright 2008, The World Bank Group. All Rights Reserved.
  • Dynamic Financial Modeling Features • Basis for Key Financial and Policy Decisions • Employs All Major Assumptions of the Case (i.e... Financial, Operating, Regulatory, etc...) • Fully Integrates the Three Primary Statements & All Operating Schedules • Allows Quick Simulation of Key Performance Variables • Flexible, Powerful, yet Extremely Simple Analytical Tool • Guides to Find a Solution Copyright 2008, The World Bank Group. All Rights Reserved.
  • Dynamic Funds Flow Dynamic Funds Flow Equity Infusion Cash Step 1: Simple Cash Step 1: Simple Cash Business Business Assets Profits Operations Operations Losses Copyright 2008, The World Bank Group. All Rights Reserved.
  • Dynamic Funds Flow Equity Infusion Dividends Paid Purchase Receivables Sale Cash Inventories Assets Profits Taxes Operations Operations Sales Copyright 2008, The World Bank Group. All Rights Reserved. Losses Step 2: Expanding Step 2: Expanding Operations Operations
  • Dynamic Funds Flow Equity Infusion Dividends Paid Retained Receivables Bad Debts Purchase Collections Sale Cash Inventories Assets Profits Operations Operations Sales Losses Taxes Copyright 2008, The World Bank Group. All Rights Reserved. Debt Step 3: Extending Step 3: Extending Credit & Marketing Credit & Marketing
  • Dynamic Funds Flow Dividends Paid Equity Infusion Retained Cash Receivables Trade Credit Sale Purchase Collections Assets Profits Inventories Interest Debt Service Operations Operations Sales Losses Taxes Bad Debts Copyright 2008, The World Bank Group. All Rights Reserved. Debt Step 4: Step 4: Raising & Raising & Servicing Servicing Debt Debt
  • Essentially a Giant Puzzle!! But there’s redemption from all this madness! Copyright 2008, The World Bank Group. All Rights Reserved. 9
  • It’s Organization!! Copyright 2008, The World Bank Group. All Rights Reserved. 10
  • Components of a Financial Model Financial Module • • • • • • • Income Statement Cash Flow Balance Sheet Investment Program Borrowing Summary Account Movements Financial Mgnt. Assumptions Copyright 2008, The World Bank Group. All Rights Reserved. Operations Module • Installed Capacity • Operating Characteristics • Revs. & Production • Operating Expenses
  • Conceptual Design of Regional Company Financial Model Consolidated Income Statement Financing Cash Flow Statement Opening Borrowing Summary Balance Sheet Investment Program Project Data Movement of Main Accounts Mgnt. Assump. Badung Klungkung Tabanan Tariff Schedule Tariff Schedule Tariff Schedule Tariff Schedule Tariff Schedule Production Connections Connections Connections Connections Connections Operating Exp. Operating Exp. Operating Exp. Operating Exp. Operating Exp. Operating Exp. Gen & Overhead Fixed Assets Fixed Assets Fixed Assets Fixed Assets Fixed Assets Fixed Assets Operation Analysis Operation Analysis Operation Analysis Operation Analysis Operation Analysis Copyright 2008, The World Bank Group. All Rights Reserved. Gianyar South Bali Treatment Plant Dempasar
  • Xiaolangdi Multipurpose Dam Project, Phase II Cost Allocation Table Power Unit Capital Investment Costs Water Supply F&S Control Consolidated 37.0% 29.0% 31.0% 97.0% 100.0% 0.0% 0.0% 100.0% Wages 54.4% 17.9% 27.7% 100.0% Other Direct Costs 54.4% 17.9% 27.7% 100.0% Works Maintenance 44.2% 21.8% 34.0% 100.0% Operating Costs: Materials Cost Reservoir Maintenance Overhead Sales & Miscellaneous Administrative Expenses Bad Debt Expense 100.0% 0.0% 0.0% 100.0% 54.4% 17.9% 27.7% 100.0% 100.0% 0.0% 0.0% 100.0% 54.4% 17.9% 27.7% 100.0% 0.0% 100.0% 0.0% 100.0% Depreciation Expense 26.0% 29.0% 45.0% 100.0% FX Loans Losses 26.0% 29.0% 45.0% 100.0% Interest Charges 26.0% 29.0% 45.0% 100.0% 100.0% 0.0% 0.0% 100.0% Income Taxes Copyright 2008, The World Bank Group. All Rights Reserved.
  • Industrial Free Zone Total Site Size Site Size (m2) Allowance for Green Area for Industrial Lots (m2) Total Developed Area of Which: Developer will Build Factories of Which: Tenant Will Build Factories Total Leaseable Area of Developer Factory Buildings of Industrial Lots Breakdown of Industrial Lots by Activity for Free Trade Zone Area for Gaza Industrial Park Area Breakdown of Factory Buildings by Activity for Free Trade Zone Area for Gaza Industrial Park Area Occupancy Rates Allocation 1997 1998 1999 2000 2001 472000 70.00% 330400 63.00% 37.00% 288770 80.00% 100.00% 122248 40.00% 60.00% 166522 38.00% 62.00% for Factories for Industrial Lots Copyright 2008, The World Bank Group. All Rights Reserved. m2 472000 Completion Schedule 0.00% 90.00% 26.00% 100.00% 58.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0 110023 43296 122248 96583 122248 166522 122248 166522 122248 44009 66014 48899 73349 48899 73349 48899 73349 48899 73349 0 0 16452 26843 36701 59881 63278 103243 63278 103243 330400 208152 122248 288770 166522 122248 122248 48899 73349 166522 63278 103243 0.00% 75.00% 50.00% 95.00% 75.00% 95.00% 95.00% 95.00% 95.00% 95.00% 0.00% 50.00%
  • Water District Water Consumption & Sales Opening Consumption Total Consumption 35,884 1996 Total Water Sales (P000) 1995 1997 1998 1999 2000 469,240 539,626 633,295 692,824 705,434 26,661,374 30,660,580 35,982,644 39,365,012 40,081,455 Total Connections 60,368 69,423 81,473 89,132 90,754 Percent Growth 68.2% 15.0% 17.4% 9.4% 1.8% Growth Factor 1.68 1.93 2.27 2.48 2.53 Commecial Consumption Annual Sales (P000) Annual Consumption (m3) Average Usage/Connection Tariff/m3 Number of Connections Percent Commercial 184,206 211,837 248,607 271,976 276,926 10,466,242 12,036,178 14,125,418 15,453,207 15,734,456 1.90 1.90 1.90 1.90 1.90 17.60 17.60 17.60 17.60 17.60 15,092 17,356 20,368 22,283 22,688 25% 25% 25% 25% 25% Residential Consumption Annual Sales (P000) Annual Consumption (m3) Average Usage/Connection Tariff/m3 Number of Connections Percent Residential Copyright 2008, The World Bank Group. All Rights Reserved. 285,034 327,789 384,687 420,848 428,507 16,195,132 18,624,402 21,857,226 23,911,805 24,347,000 0.980 0.980 0.980 0.980 0.980 17.60 17.60 17.60 17.60 17.60 45,276 52,067 61,105 66,849 68,065 75% 75% 75% 75% 75%
  • Organizing Your Model Key Considerations • • • • Who’s Perspective Currency Risk Profit Cost/Centers Implementation Stages Copyright 2008, The World Bank Group. All Rights Reserved.
  • Some Useful Tips • Use a Standard Template for All Models • Years in Columns, Accounts/Categories in Rows • Don’t Cut Corners (worksheets schedules statements) • Put all The Output Statements in One Sheet (pass protect) • Customize Operating Module (Brainstrom) • Combine Operating Assumptions with Results in Schedules (color code). • Use the movement of Accounts Schedule to Link to Statements Copyright 2008, The World Bank Group. All Rights Reserved. 17
  • How I Organize Models. • • • • • • • • • Title Project Data Sheet Opening Balance Sheet Management Assumptions Demand, Production & Operations Investment (CAPEX) Program Financing Options Output Statements Rate of Return Calculations Copyright 2008, The World Bank Group. All Rights Reserved. 18
  • Project Data Sheet Copyright 2008, The World Bank Group. All Rights Reserved. 19
  • Opening Balance Sheet Copyright 2008, The World Bank Group. All Rights Reserved. 20
  • Management Assumptions 2010 Cash Position Provision for Bad Debt Power Accounts Receivable Inventories Other Current Assets Interest Earned Short Term Borrowings Accounts Payable Tax on Interest 2011 2012 2013 2014 0.7 1% 1.2 0.5 50.0 6% 2.0 2.0 2.0 0.065 0.065 0.065 0.3 Interest Payable Income Taxes 0.7 1% 1.2 0.5 60.0 5% 0.065 Taxes Payable 0.7 1% 1.2 0.5 60.0 5% 2.1 Customer Deposits 0.7 1% 1.2 0.5 60.0 5% 1 0.3 0.3 1 20% Copyright 2008, The World Bank Group. All Rights Reserved. 1 20% 0.065 Amount per New Sercice Connection 0.3 0.3 1 20% 0.7 Months of Operating Expenses 1% On Oustanding Receivables 1.2 Months of Annual Revenues 0.5 Months of Operating Expenses 60.0 Days of Operating Expenses 5% Earned on Short-Term Deposits Percent of CAPEX 2.0 Months of Operating Expenses 1 20% Months of Income Tax Chage Months of Interest Expense 20% On Profit Before Taxes 21
  • Demand, Production & Operation Copyright 2008, The World Bank Group. All Rights Reserved. 22
  • Investment Program Copyright 2008, The World Bank Group. All Rights Reserved. 23
  • FX Financing Schedule Copyright 2008, The World Bank Group. All Rights Reserved. 24
  • Movement of Accounts Copyright 2008, The World Bank Group. All Rights Reserved. 25
  • Copyright 2008, The World Bank Group. All Rights Reserved. 26
  • Copyright 2008, The World Bank Group. All Rights Reserved. 27
  • Focus on The Fund Flow Statement • Non-Conventional Format to Simulate Decision Making of the CFO • Incorporates a Financing Logic • Incorporates Inherent Desirability of Investments • Point of Reference Where Solution is Attained Copyright 2008, The World Bank Group. All Rights Reserved.
  • 1st Priority 2nd Priority 3rd Priority 4th Priority 5th Priority Copyright 2008, The World Bank Group. All Rights Reserved. 29
  • Common Mistakes Copyright 2008, The World Bank Group. All Rights Reserved.
  • Common Mistakes 1. 2. The model becomes the End Goal, not the financial results Tries to do too many things, tariff structure, trend analysis, volume forecasts, demand elasticity 3. Not properly organized 4. Cutting corners 5. Detailed breakdown/elaboration on non material variables 6. Requiring inordinate amounts of data 7. Add historical presentation to projections 8. Goal seek for an independent variable 9. Investment and projection period 10. Escalating revenues with expenses 11. Accumulating cash 12. Linking to other workbooks Copyright 2008, The World Bank Group. All Rights Reserved.
  • Discussion!! Copyright 2008, The World Bank Group. All Rights Reserved. 32