Consulting toolkit modelling

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Consulting toolkit modelling

  1. 1. CONSULTING TOOLKIT Consulting Skills: Modelling© 2007-2012 IESIES Development Ltd. All Ltd. Reserved © 2007-2012 Development Rights All Rights Reserved
  2. 2. You will create better models with experience GENERAL MODELLING TIPS •Design your model on paper before you hit the spreadsheet •Storyboard the charts (dummy pack) early •Modular construction: o You have some output early o Debug as you go •Simplify – dynamic complexity, not detail •Invest a few moments to keep it clean and clear as you build •It is a means, not an end: o Sense check at every stage o Translate back into the business “story” o Remember the question it is supposed to answer020910 Chris Doran © 2007-2012 IES Development Ltd. All Rights Reserved 1
  3. 3. Build your valuation model in logical steps, debugging at every stageSTEPS IN BUILDING A VALUATION MODEL1) Enter 3 years of historical cashflow, P&L and balance sheet2) Calculate key drivers/ratios of historical results3) Project flat “vanilla” assumptions for key ratios4) Calculate projected cashflow, P&L and balance sheet5) Debug your model – check you get sensible number6) Develop a “story’ on the future of the industry/business7) Turn your story into different financial assumptions on the key drivers8) Sense check your FCF9) Calculate Terminal values, enterprise value, equity value10) Compare equity value to current market capitalisation11) Run sensitivities © 2007-2012 IES Development Ltd. All Rights Reserved
  4. 4. Build a FCF forecast in a logical sequenceSTEPS 1-4: BUILDING A “VANILLA” VALUATION MODELCASHFLOW Historical Historical Estimate Forecast 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Revenue 8,267 12,246 14,789 17,085 19,427 21,815 24,251 26,736 29,271 31,857 Cost of Goods -7,684 -11,332 -13,760 -15,804 -17,970 -20,179 -22,433 -24,731 -27,076 -29,467 Gross Profit 583 914 1,029 1,281 1,457 1,636 1,819 2,005 2,195 2,389 Other income 300 760 1,169 1,281 1,457 1,636 1,819 2,005 2,195 2,389 Distribution expense 1) -508 -1,097 -1,563 HISTORICAL -1,794 4) PROJECTED FIGURES -2,040 -2,291 -2,546 -2,807 -3,073 -3,345 Other operating expenses FIGURES -146 -273 -325 -427 (Calculated output) -585 -466 -502 -534 -561 -605 Operating profit (EBIT) 229 304 310 342 408 480 558 642 732 828 Cash taxes -39 -64 -37 -68 -82 -96 -112 -128 -146 -166 NOPLAT 190 240 273 273 326 384 446 513 585 663 Depreciation 25 59 106 157 209 271 335 422 510 586 Gross Cash Flow 215 299 379 430 535 655 781 935 1,095 1,248ASSUMPTIONSASSUMPTIONSNew stores 67 101 100 100 100 100 100 100 100 100 Cost (RMBm)/new store Revenue per new store 2) HISTORICAL 29 3 49 3 39 4 4.2 20 3) 4.4 4.6 PROJECTED 20 20 4.9 20 5.1 20 5.4 20 5.6 20Other capex spend DRIVERS/ 78 121 57 RATIOS 140 DRIVERS/RATIOS (Input422 157 209 271 335 data)510Like for like sales growth, % 2% 0% -3% 2% 2% 2% 2% 2% 2% 2% © 2007-2012 IES Development Ltd. All Rights Reserved
  5. 5. The more you practice, the better you will get at modelingGENERAL TIPS ON VALUATION MODEL BUILDING •Think through key value drivers, ratios and economics of the industry/company you are modeling – include as assumptions •One source principle: Set it up so that changing one cell impacts all related cells, don’t have to remember to enter twice •Don’t “hardwire” numbers; even if you think it won’t change, set it up as a separate assumption •Make it easy to edit – you are certain to want to change your model •Start simple. Get something that works, then incrementally make it more accurate/complicated, don’t build something complicated and never know where the bugs are •Best practice is to Project P&L, Balance sheet as well as Cash flow (can simplify, but MUST project Working Capital and fixed asset register) © 2007-2012 IES Development Ltd. All Rights Reserved
  6. 6. Always remember the purpose of your model to avoid getting paralysed by detailTHE GOLDEN RULE OF MODELLING 80/20•Focus your time and attention on what matters, don’t sweat every detail•The purpose is to provide insight and understanding, not accounting perfection © 2007-2012 IES Development Ltd. All Rights Reserved

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