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All Rights Reserved. Corporate Bridge TM
FinancialModeling–Ebook1of4
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Financial Modeling E-book
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com 2
This is the 1st E-Book o...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com 3
Discussion topics
 Over...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Introduction to Financial ...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Assumptions – Importance i...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Excel Best Practices
 Mai...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Excel Best Practices
 Be ...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Modeling Warm Up!
 Use a ...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Things to Remember
 Histo...
FinancialModeling–Ebook1of4
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Key Financial Statements -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Income Statement - Sample
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Balance Sheet - Sample
Pri...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Cash Flow Statement - Samp...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Income Statement - Sample
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Income Statement - Sample
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Income Statement - Sample
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Balance Sheet - Sample
Pri...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Illustrative Flow of Funds...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Working Capital Schedule
...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Working Capital Schedule -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Working Capital Schedule -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Working Capital Schedule -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Working Capital Schedule -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Working Capital Schedule -...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Balance Sheet - Sample
 L...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
www.educorporatebridge.com
Cash Flow Statement - Samp...
FinancialModeling–Ebook1of4
All Rights Reserved. Corporate Bridge TM
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Illustrative Flow of Funds...
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FinancialModeling–Ebook1of4
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Financial modelling e book part 1

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    32 ebooks on Financial Modeling, Accounting, Corporate Finance, Quantitative Analysis etc.
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Transcript of "Financial modelling e book part 1"

  1. 1. All Rights Reserved. Corporate Bridge TM FinancialModeling–Ebook1of4 www.educorporatebridge.com Financial Modeling E-book Part 1 of 4
  2. 2. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com 2 This is the 1st E-Book of the series of 4 free E-books on Financial Modeling To get other 3 parts for free Visit: https://www.educorporatebridge.com/freebies3.php For More FREE Resources Finance News, Articles, Interview Tips etc https://www.educorporatebridge.com/blog For Online Finance Courses For any other enquiry / information Email – support@cbacademy.in https://www.educoporatebridge.com https://www.educorporatebridge.com/freebies3.php Corporate Bridge Blog
  3. 3. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com 3 Discussion topics  Overview of Financial Modeling  Excel Best Practices  Modeling Warm Up  Key Financial Statements  Working Capital Schedule  Depreciation Schedule  Amortization Schedule  Long Term Items (Others) Schedule  Building Income Statement  Shareholder’s Equity Schedule  Shares Outstanding Schedule  Preparing for Debt & Interest  Trouble Shooting  Completing the Financial Model
  4. 4. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Introduction to Financial Modeling  Simplified representation of performance  Both past and future  Blend of skills is required  Understanding of the company‟s (project‟s) operations  Accounting Knowledge  Corporate Finance principles  Excel (spreadsheet) techniques  Different Types of Models  Earnings model with projected earnings/ profits  Debt/ Recapitalization/ Financing Model  Merger Consequences model (Mergers/ Acquisitions/ Divestitures)  Discounted Cash Flow models  Utility of Financial modeling  Virtual recreation of the actual business (need to understand the business logic)  Ability to test assumptions to analyze impact on future performance • Growth Rates • Operating Margins • Product lines/ business segments • Refinancing/ recapitalization  Understanding the purpose of the modeling in order to create the right design and functionality 4
  5. 5. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Assumptions – Importance in Financial modeling  Need to have clear and well defined assumptions  Referred to as „drivers‟ or „inputs‟ these are based on a thorough understanding of the business  Assumptions should reflect business realities and expectations  No bias should get into the assumptions on the business  Always remember “GIGO” – Garbage In Garbage Out  Use the past performance and a guide for future expectations  Clearly understand the expected changes in future performance  Understand Management expectations  Check out what other analysts think about the company  How to make Assumptions  Past as an indicator of future performance, except in case of • Start up situations • Significant acquisitions or divesture activities • Volatile industry structure  Key tests a financial model should withstand  Is it a reasonable model  Can the assumptions/ model be defended  Features of an effective model  Should be realistic based on reasonable and defensible assumptions and projections  Should be flexible and adaptable with dynamic working schedules (or modules)  Should be easy to follow, should not intimidate the reader 5
  6. 6. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Excel Best Practices  Maintain Consistency  Makes understanding and constructing easier  Consistent Color scheme makes life easy for self and others using the model • BLUE for inputs (historical data, assumptions, drivers) • BLACK for calculations and references on same schedule/ asset • GREEN reference from another schedule/ sheet • RED warnings to another user/ links to another model  Clarity of presentation  You should be able to understand the model when you revisit after some time lapse!  More Important – Others should be able to understand!  Be efficient  Utilize excel to improve productivity  Do Not hard code in formulae cells  Separate line items are always useful Private and Confidential – Not for Circulation 6 X √
  7. 7. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Excel Best Practices  Be efficient  Do not input same numbers twice. Also, Excel takes care of formatting!  Never Hide rows or columns – its useful to group them instead (Data -> Group)  Set up the first sheet as a template for a complete worksheet using Page Set Up • Use Edit -> Move/ Copy Sheet to create as many sheets as required in the model • Take care as named cells will be duplicated in the new sheet Private and Confidential – Not for Circulation 7
  8. 8. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Modeling Warm Up!  Use a Modular Approach  Core Statements – Income Statement, Balance Sheet, Cash Flow Statements • Focus on Others  Prepare supporting schedules • Do all the “dirty” work • Use them as a conduit between core schedules • Export the supporting schedules to the core statements on completion  Balance Sheet and Cash Flow Statements • All projections need to be referenced from Schedules Private and Confidential – Not for Circulation 8 Working Capital Plant & Machinery, Depreciation Intangibles, Amortization Income Statement Cash Flow Statement Balance Sheet Debt & Interest Shareholder’s Equity Other LT Items
  9. 9. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Things to Remember  Historical data as a guide for projections  Aim at projecting future performance  Remember you are an Analyst and not an Auditor!  Do not get worked up if historicals do not reconcile (its quite common!)  Reasonable and Defensible set of Assumptions and Projections  Models need to be efficient and clear  A bad model is difficult to follow and audit  A good model should be easy to follow and focus on key drivers  Use Beta testing  Test the logic after inputting right or down – check for flow  Challenge each assumption with the following  How does the model behave if you increase the assumption?  What is a impact if the assumption is decreased?  Try making the assumption equal to Zero  What if the sign of the assumption changes? Private and Confidential – Not for Circulation 9
  10. 10. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Key Financial Statements - Overview  Create the line items  Income Statement  Balance Sheet  Cash Flow Statement  Income Statement  Historical information  Project Revenue and Operating expenses (Sales to EBITDA)  Balance Sheet  Historical data only Private and Confidential – Not for Circulation 10
  11. 11. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Income Statement - Sample Private and Confidential – Not for Circulation 11  Setting up the Income Statement  Sources for appropriate line items – financial statements, management guidance and research  Incorporate detailed line items to suit the business under analysis  Ensure the income statement represents the company/ industry
  12. 12. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Balance Sheet - Sample Private and Confidential – Not for Circulation 12  Setting up the Balance Sheet  Sources for appropriate line items – financial statements, management guidance and research  Simplify or expand line items to sit the analytical objective  Modify as required to represent the company/ industry
  13. 13. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Cash Flow Statement - Sample Private and Confidential – Not for Circulation 13  Setting up the Cash Flow Statement  Past allowances are usually not made – historical cash flow statements are often difficult to reconcile  Ensure the columns are consistent with the Income Statement and the Balance Sheet  Standard layouts are useful for references from other schedules
  14. 14. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Income Statement - Sample Private and Confidential – Not for Circulation 14  Input past information in the Income Statement  Normalize for any non-recurring items  Ensure to make notes as necessary  Calculate historical ratios & growth rates  Do not forget formatting! Inputs are in Blue Calculations in Black
  15. 15. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Income Statement - Sample Private and Confidential – Not for Circulation 15  Forecast net sales for future years  Drivers: forecasted annual sales growth  Sources: management guidance, research, past trends  Challenge assumptions for being reasonable  Footnote all sources for assumptions Only one blue input cell if constant growth is assumed Forecasted figures Drivers based on input assumptions
  16. 16. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Income Statement - Sample Private and Confidential – Not for Circulation 16  Forecast future operating expenses  Drivers: margin assumptions for future operations  Sources: management guidance, research, past trends  Challenge assumptions for being reasonable  Other Expense/ (Income) is usually a number based on research/ past trends (but not in % terms like other specific line items)  Calculate till EBITDA. Depreciation & Amortization will be referenced from schedules to be built in model Drivers Calculations Inputs from research/ past trends
  17. 17. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Balance Sheet - Sample Private and Confidential – Not for Circulation 17  Input past information for the Balance Sheet  Check if past Balance Sheets are balancing  If combining line items into one item, make sure not to miss out any items Its practical to show 2 condensed debt items Inputs are in Blue Calculations in Black
  18. 18. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Illustrative Flow of Funds Private and Confidential – Not for Circulation 18 Income Statement Cash Flow Statement Balance Sheet
  19. 19. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule  Working Capital Overview  Create the working capital line items  Reference the historical balances  Calculate past ratios related to working capital items  Project future working capital by each line item  Calculate projected cash flows generated out of working capital items  Link with balance sheet & cash flow statement work sheets Private and Confidential – Not for Circulation 19  Setting up the Working Capital Schedule  Ensure clarity by using the same working capital line items in the same order in the balance sheet  Reference Net Sales & Cost of Goods Sold from the Income Statement – these are the drivers for working capital line items Referenced from Income Statement
  20. 20. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule - Sample  Reference the past data from the balance sheet  Calculate net working capital  Arrive at increase/ decrease in working capital Private and Confidential – Not for Circulation 20 Calculations Referenced from BS
  21. 21. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule - Sample  Calculate historical ratios and percentages  Use the ending or average balance  Both are acceptable as long consistency is maintained Private and Confidential – Not for Circulation 21 Calculations
  22. 22. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule - Sample  Assumptions for future working capital items  Certain items without an obvious driver are usually assumed at constant amounts  Ensure assumptions are reasonable and in line with the business Private and Confidential – Not for Circulation 22 Assumptions References, if constant
  23. 23. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule - Sample Private and Confidential – Not for Circulation 23  Use the future ratios and assumptions to project the forecasted working capital balances Drivers Drivers Projections
  24. 24. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Working Capital Schedule - Sample Private and Confidential – Not for Circulation 24 Calculations Check and make sure the signs match!  Arrive at Cash Flows based on individual line items  Ensure signs are accurate!
  25. 25. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Balance Sheet - Sample  Link up the forecasted Working Capital to the Balance Sheet Private and Confidential – Not for Circulation 25 Referenced from Working Capital Schedule
  26. 26. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Cash Flow Statement - Sample  Link up the forecasted Working Capital cash flows with the Cash Flow Statement Private and Confidential – Not for Circulation 26 Referenced from Working Capital Schedule
  27. 27. FinancialModeling–Ebook1of4 All Rights Reserved. Corporate Bridge TM www.educorporatebridge.com Illustrative Flow of Funds Private and Confidential – Not for Circulation 27 Income Statement Cash Flow Statement Balance Sheet Working Capital Sales COGS Change in WC Working Capital Working Capital Schedule
  28. 28. All Rights Reserved. Corporate Bridge TM FinancialModeling–Ebook1of4 www.educorporatebridge.com For FREE Resources Corporate Bridge Blog Finance News, Articles, Interview Tips etc https://www.educorporatebridge.com/blog For Online Finance Courses For any other enquiry / information Email – support@cbacademy.in https://www.educoporatebridge.com https://www.educorporatebridge.com/freebies3.php
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