Financial modeling in Excel for Business Analysts and Consultants

1. 1 Financial Modeling in Excel for Business Analysts and Consultants Step by step practical guide

2. 2 Introduction

3. 3 In this presentation I will show you how to create and analyze financial model in Excel

4. 4 We will use real life example of company producing hand- made products from clay

5. 5 I will show you the steps that will enable you to get from estimation of separate cost and balance sheet position into 3 financial statements Sales M&E External services Taxes & Payments Payroll Taxes Other CAPEX Depreciation – 6 groups Working Capital Debt Equity changes Profit & Loss Balance Sheet Cash Flow

6. 6 What we will talk about in this presentation is organized in the following sections Profit and Loss modelling Capex and Depreciation Working Capital Debt AnalysesCash flow modeling Balance sheet modeling Equity

7. 7 What I will show in this presentation is a part of extensive on-line course where I show you in details how to do it in Excel and you can download the models in Excel Financial Modeling for Business Analysts and Consultants $45 $15 Click to check my course

8. 8 Before we start remember there are 2 types of models that you will be building. In this presentation we will talk only about financial models Financial Model Business model  Mainly done for budgeting and valuation  Mainly done managing business, searching for opportunities  Financial models look very similar  Business models are specific to the company, the industry and the business model  Used heavily for external purposes: talk with the Supervisor Board, banks, future investors, auditors  Used heavily for internal purposes: planning, looking for opportunities, analyzing performance  Generates financial statements: P&L, BS, CF  Is driven by many KPIs and quantitative elements. Shows in-depth relation between KPIs  Has some KPIs and quantitative elements

9. 9 If you want to learn more about on-line business models go to the following presentation Business models Practical guide for startups and entrepreneurs presentation

10. 10 Let’s start with the first section Profit and Loss modelling Capex and Depreciation Working Capital Debt AnalysesCash flow modeling Balance sheet modeling Equity

11. 11 Profit and Loss modelling

12. 12 We will start with modelling the cost position of profit and loss statement. Once we are done with it we will link it to profit an loss Sales M&E External services Taxes & Payments Payroll Taxes Other CAPEX Depreciation – 6 groups Working Capital Debt Equity changes Profit & Loss Balance Sheet Cash Flow

13. 13 We will use real life example of company producing hand- made products from clay Ceramic dishes Ceramic chimneys Ceramic tubes Ceramic pots

14. 14 Sales Estimation

15. 15 For every category of sales you should have estimation of quantity sold as well as the average price. You also should have some assumption on growth (both of price as well as quantity sold) Ceramic dishes sales # of dishes sold at the beginning Average price at the beginning % growth in volume in next years % growth of average price in next years

16. 16 On the basis of this assumption you should create a separate sheet with sales forecast

17. 17 Materials and Energy Estimation

18. 18 We estimate separately materials and energy in the sheet M&E. First we divide into Fixed and Variable. Variables we estimate as a percentage of sales Materials & Energy Materials Energy Fixed Variable Sales % of sales Fixed Variable Sales % of sales

19. 19 On the basis of this assumption you should create a separate sheet with Material and Energy estimation

20. 20 The data on sales value and volume should be fed from Sales sheet to M&E sheet (Material and Energy estimation) Sales M&E  Sales Value  Sales Volume

21. 21 Payroll and social security Costs

22. 22 Now we move to the Payroll. We divide it into Head Office and Production Payroll Costs Head Office Direct Production # of employees Average salary % growth of salary # of employees Average salary % growth of salary

23. 23 Social security are usually estimated in relation to payroll costs. In our case we assume 27% of estimated previously costs Social security costs Payroll Costs= 27% x

24. 24 On the basis of this assumption you should create a separate sheet For Payroll and social securities sheet

25. 25 External services

26. 26 We now estimate External services. We divided them into fixed and variable part. Variable is estimated as a percentage of Sales External Services Fixed Variable Bought in Country Imported Sales % Sales

27. 27 On the basis of this assumption you should create a separate sheet with External services estimation

28. 28 The data on sales value should be fed from Sales sheet to External services sheet Sales External services  Sales Value

29. 29 Capex and depreciation

30. 30 When it comes to assets the problem is that they have 3 different components that you have to track. On top of that every asset has to be tracked separately DepreciationGross book value Net book value

31. 31 We get the net book value by deducting from gross book value the sum of all depreciation ever done Sum of all Depreciation Gross book value Net book value=_

32. 32 We first divide the fixed assets into 6 groups Fixed Assets Land Transportation Intangibles Buildings Equipment and Machinery Others

33. 33 Every group has its own sheet where we estimate the gross value, depreciation on net value. Below example for Intangibles. As you can see this has to be done by years in which the asset was bought

34. 34 After we are done with each and other type of asset we can summarize the date in the sheet FA Summary

35. 35 Below you can see how the data flows from the sheets where we have estimation for each and every group of assets to FA Summary and later on to Balance sheet (BS) and Profit & Loss account (P&L) CAPEX FA Intangibles FA Machinery FA Transp eqmt FA Other FA Summary P&L BS FA Buildings  Depreciation  Net book value

36. 36 More details you can find in my on-line course where you can you will see how to do it in Excel and you can download the models in Excel Financial Modeling for Business Analysts and Consultants $45 $15 Click to check my course

37. 37 Taxes & Payments

38. 38 Companies pay taxes and payments (especially local ones) that go into costs. We assumed them to be fixed

39. 39 Other costs and revenues

40. 40 We estimate other costs and revenues as a percentage of sales Other costs by type Sales % of Sales Other operating costs Sales % of Sales Other operating revenues Sales % of Sales

41. 41 On the basis of this assumption you should create a separate sheet for Other costs and revenues

42. 42 Profit & Loss statement

43. 43 We get the Profit and Loss sheet projection in a separate sheet by feeding in the data from other sheets

44. 44 Let’s go to next section Profit and Loss modelling Capex and Depreciation Working Capital Debt AnalysesCash flow modeling Balance sheet modeling Equity

45. 45 Working Capital

46. 46 Working capital consists of 4 major groups of components Inventory Working Capital Materials WIP Goods Finished Products Receivables Payments in advance for deliveries Trade receivables Other receivables Receivables resulting from taxes, subsidies Short term accruals Liabilities Trade liabilities Prepayments for deliveries Liabilities resulting from taxes, charges Liabilities resulting from salaries Accruals Cash and equivalents

47. 47 We will draw data from other profit and loss sheets and on the basis of the data we will calculate the working capital positions that in turn will be fed into Balance and sheet as assets or liabilities P&L Sales External Services Other Working Capital BS - Assets BS - Liabilities M&E  Assets  Liabilities

48. 48 When it comes to assets the problem is that they have 3 different components that you have to track. On top of that every asset has to be tracked separately Turnover rotation in days Basis i.e. sales / operating costs / materials Position of Working capital i.e. inventory / receivables =x 365÷

49. 49 On the basis of this assumption you should create a separate sheet for working capital

52. 52 Debt

53. 53 When it comes to debt we have 2 loans. For the balance sheet statement we have to divide it into short term and long term part Debt Old loan New Loan Short-term part Long-term part Short-term part % Sales

54. 54 In a separate sheet we estimate the opening balance and the ending balance of each and one of the loans (on the basis of assumed payment schedule). This allows also to estimate interest paid on the loans

56. 56 Equity

57. 57 In a separate sheet we model all the relations with the owners like dividend policies, contribution to be paid, etc.

59. 59 Balance sheet

60. 60 Once we have the Assets modeled in FA summary as well as the most of the position of the Current Assets in Working Capital we get everything together Balance sheet Total Assets Total Liabilities Fixed assets Current Assets Equity Liabilities

61. 61 For the categories we get the date from the separate sheets Balance sheet Total Assets Total Liabilities Fixed assets Current Assets Equity Liabilities FA Summary Working Cap SC Working Cap Debt

62. 62 The only thing we are missing is the cash. We did it on purpose and there is a nice way to estimate the cash position and still the model be consistent

63. 63 You have to get Assets equal to Liabilities in Balance Sheet. You achieve it by not modelling the cash but by calculating it as a difference between Liabilities and all other assets (except for Cash) FA Summary BS – Assets (w/o Cash) Working Cap Debt P&L (Profit) Working Cap BS – Liabilities SC (Equity) Cash =

64. 64 You have to get Assets equal to Liabilities in Balance Sheet. You achieve it by not modelling the cash but by calculating it as a difference between Liabilities and all other assets (except for Cash) Cash = BS – Liabilities BS – Assets (w/o Cash) -

65. 65 We get the Balance sheet projection in a separate sheet

67. 67 Cash Flow

68. 68 In Cash flow you try to divide the CF into 4 parts Investment CF CF Operating activities CF Financial CF CF to / from shareholders CF

69. 69 We will try to get from Net profit to the Cash position Net profit Change in Cash and cash equivalents CF Change in Cash and cash equivalents BS=

70. 70 We will estimate CF on 4 different levels FA Summary CF – Operating Activities P&L  Deprecation  Difference between Interest earned and paid BS  Change in inventories, receivables  Change in provisions, short-term liabilities, prepayments and accruals  Other adjustments CF – before financial activities  Disposal of intangible and tangible fixed assets CAPEX  Capital expenditure CF – Free cash flows to equity  Change in bank and other loans P&L  Interest paid and earned CF – Free cash flows to firm SC  Shareholder-related payments and contributions  Gross dividend paid Investment CF Financial CF CF related to shareholders

71. 71 We get the Cash flow projection in a separate sheet

72. 72 Let’s go to final section Profit and Loss modelling Capex and Depreciation Working Capital Debt AnalysesCash flow modeling Balance sheet modeling Equity

73. 73 Analyses

74. 74 So we managed to get integrated model that we can play with and see what can we do further with our company P&L Sales External Services Other CF BS FA Summary M&E Debt Work Cap SC Payroll FA Summary Taxes & Payments CAPEX

75. 75 Now you can finally analyze a lot of things using this model Estimate the value of the business Check what change in sales can do to the cash position Check what change in cost can do to profitability of the business Play with financing structure Estimate the boundaries of the business Use it as a tool during due diligence Use the model to get financing for acquiring the business Play with the dividend policy

77. 77 You can also find useful some tips on Excel Essential Excel for Business Analysts and Consultants A practical guide presentation

78. 78 Check also business modeling in Excel Business models Practical guide for startups and entrepreneurs presentation

79. 79 I recommend also looking at some techniques to improve your business. Click on the cover below to go to the presentation How to become world class analyst A practical guide presentation

80. 80 ….and how to perform market research Market research Practical guide for startups and entrepreneurs presentation

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83. 83 If you need more detailed version on productivity hacks you can check our course on productivity hacks Click to check my course Management Consulting Productivity hacks

84. 84 Check my presentation on restaurant business model to understand it properly How to open a successful restaurant A practical guide presentation

85. 85 Check my presentation on on-line models to understand them properly On-line Business Modesl A practical guide presentation

86. 86 For more check also my on-line course Click to check my course

87. 87 Check my presentation on starting and running consulting company Start and run consulting company A practical guide presentation

88. 88 There is an interesting summary of ways to test cheaply businesses MVP – how to test your business idea without building the product A practical guide presentation

Financial modeling in Excel for Business Analysts and Consultants

Financial modeling in Excel for Business Analysts and Consultants

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