The BG Financial Modelling Primer is a useful resource for anyone managing juniors who are developing their modelling and valuation skills. The primer describes: 1. What is a financial model? 2. Why modelling is an essential part of a banker's technical toolkit 3. The stages involved in learning efficient financial modelling 4. A skills map for juniors from 1 to 6 years into their roles 5. A typical 12-18 month learning pathway 6. Types of financial models 7. Modelling glossary

1. A hi i E ll
A Primer for L&D
Achieving Excellence
in Financial Modelling
Experts in Financial Training

2. What is a Financial Model?
 A financial model, in its most simple form, is a spreadsheet (typically in Excel)A financial model, in its most simple form, is a spreadsheet (typically in Excel)
created to lay out the financial statements of companies or projects and build
forecasts (known as “financials”)
 The use of a spreadsheet makes it easier to arrange the financials in an The use of a spreadsheet makes it easier to arrange the financials in an
organised format that can be divided and manipulated as needed
 The outputs of a financial model can be used to interpret and evaluate the
fi i l d id th bilit t d l i b t j tfinancials and provide the ability to draw conclusions about a company, project
or transaction (“financial analysis”)
 Outputs include growth rates, credit ratios or returnsp g
 Examples of interpretation include assessing the company’s profitability, the
level of indebtedness, the right value of a business (how much to pay for a
business)business)
 Financial models can vary in type and complexity depending on the
requirements of the client/transaction
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3. An Essential Toolkit for Bankers
 Financial models are an essential part
of a banker’s technical toolkit
 They make it easier to undertake
Build a
Financial
ModelThey make it easier to undertake
financial analysis in a more accurate,
efficient and speedy fashion
 This in turn facilitates better decision Financial This, in turn, facilitates better decision
making internally when assessing the
type of product (including quantity
and pricing) or the advice offered to
Interpretation
and
Analysis
a d p c g) o t e ad ce o e ed to
clients
 It also improves the quality of advice
provided to clients by the banker
and
Conclusions
provided to clients by the banker
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4. Financial Model Learning Stagesg g
Beginner
(0 – 3 years)
Intermediate
(2 - 5 years)
Advanced
(3 – 8 years)
 Financing models,
e.g. leveraged
buyouts (“LBOs”)
 Develop scenarios
 Construct debt
schedules
 Organise the model
and construct
formulae in Excel
 Modelling
transactions, e.g.
merger modelling
schedules
 Develop model for
credit analysis
D l d l f
 Build 3 statement
financial models
(Balance Sheet,
 Project finance
modelling
 Develop model for
valuation purposes,
e.g. comparables or
discounted cashflow
P&L and Cashflow
Statements)
 Project financials
discounted cashflow
analysis (“DCF”) Error checking and
Excel proficiency
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5. Skills Map Through the Yearsp g
0-3 years 3 6 years 6 years onwards0-3 years 3- 6 years 6 years - onwards
 Mastery of financing models,
e.g. leveraged buyouts
(“LBOs”)
 Develop scenarios
 Confidence in building a model
 Learning functionalities of
excel
O i th d l d ( LBOs )
 Mastery of modelling
transactions, e.g. merger
modelling
 Project finance modelling (for
from scratch
 Interpretation of numbers
 Explanation of model and why
 Identifying and checking errors
 Organise the model and
construct formulae in Excel
 Build 3 statement financial
models (Balance Sheet, P&L
and Cashflow Statements)
infrastructure bankers)
 Focus on origination and deal
flow
 Idea generation
At li t ti
 Construct debt schedules
 Develop model for credit
analysis
 Develop model for valuation
purposes e g comparables or
 Project financials
 Knowing how to check for
errors
 Being able to explain the
model  At client meetings
 Confidence in presenting
and substantiating the
numbers
purposes, e.g. comparables or
discounted cashflow analysis
(“DCF”)
 Financing models, e.g.
leveraged buyouts (“LBOs”)
model
 Understanding the different
models
 Understanding the why and
attention to detail
 Modelling transactions, e.g.
merger modelling
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Financial modelling is underpinned by ongoing mastery of financial analysis and accounting

6. Typical 12-18 Month Learning Pathwayyp g y
Month 1Month 1
Graduate Programme
6 - 8 months 12 - 18 months
 Advanced accounting
 Leasing & pensions
 Transaction
d lli
 Intermediate accounting
 Intermediate valuation
 Modelling
 Accounting
Fundamentals
 Valuation
M d lli modelling
 Advanced valuation
 Advanced modelling
 Intermediate –
advanced
 Error checking
 Modelling
 Basic –
Intermediate
 Reasonable knowledge  Interpreting the numbers
 Advanced topics on other
products:
D i ti
 Build upon foundation of:
 Merger modelling
 DCF
 Reasonable knowledge
of the following topics:
 DCF
 LBO  Derivatives
 Convertibles
 LBO
LBO
 Merger modelling
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Technical class room training is combined with practical on the job learning, learning from others
and doing by experience

7. Types of Financial Models (I / II)yp ( )
 There are different types of financial models that are used by corporate There are different types of financial models that are used by corporate
and investment bankers, serving different purposes
Model Type OverviewModel Type Overview
Three Statement
Cashflow
 Includes three financial statements (P&L, Balance Sheet
and Cashflow)
 Used as a basis for developing projections
Discounted Cashflow
(DCF)
 A model that is derived from the cashflow projections
above (unlevered) to value a company
Comparable Company
or Comparable
Transaction Analysis
 A model that calculates the value of a company by
applying its financial metrics to valuation ratios of similar
listed companies or similar transactionsTransaction Analysis
(“Comps”)
listed companies or similar transactions
Transaction  Models that assess the financial impact of the
combination of two businesses including merger models
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combination of two businesses, including merger models
and accretion / dilution

8. Types of Financial Models (II / II)yp ( )
Model Type Overview
Credit Analysis  Uses the 3 statement model to derive key (credit) ratios that
measure the amount of debt and the ability to repaymeasure the amount of debt and the ability to repay
Leveraged Buyout
(“LBO”)
 Builds on the three statement financial model to determine
th t f d bt t d th t(“LBO”) the amount of debt a company can support and the return on
investment achieved at a particular valuation
 Typical for highly levered (indebted) transactions
Project Finance  A long term cashflow model for a project (e g building of aProject Finance  A long term cashflow model for a project (e.g. building of a
road or power station), that typically involves construction
(though not always) of an infrastructure asset
 Used to assess the amount of leverage it can support and the
returns
 Are typically more complex than LBOs due to the type of data
available and level of detail required
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9. Types of Models for Bankersyp
Investment
Banking
- DCF
- Comps
- Transaction
LBO
Banking
- LBO
Corporate
Banking / Lev.
Finance
Three Statement
Model –
underpins all
other financial
models Structured /
- Credit
- LBO
Project
Finance –
they use their
own specific
models as the
Project Finance
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detail and
information is
specific

10. Glossary of Terms (I / II)y ( )
Term Description
Financials Actual or forecast financial data of the company, upto and
including the three financial statements of a company (profitg p y (p
and loss account, balance sheet and cashflow statements)
Financial Analysis The evaluation of financial data to interpret / draw conclusions
using different methodologies. An example includes
determining how indebted it is by looking at ratios, i.e. debt /
operating profit
Cashflow The cash generated by a business from its operating, investing
and financing activities
Comparables
(“Comps”) /
Multiples
A valuation multiple is a ratio between a valuation metric and a
financial or operating metric, i.e. price per share / earnings per
share (P/E multiple) for a company. Comps are valuation
multiples prepared for companies that are similar to the target
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multiples prepared for companies that are similar to the target
company in question

11. Glossary of Terms (II / II)y ( )
Term Description
Leverage /
Indebtedness
Amount of debt in the company or project, sometimes gross
(excluding) or net (after deducting) of cash( g) ( g)
Financial Metric A financial number provided or derived from a set of accounts,
i.e. Revenues, Operating Profit, EBITDA, etc
EBITDA Earnings before interest, taxes, depreciation and amortisation
Convertibles A type of financial debt that converts into equity (shares) under
certain conditions
Derivatives A complex financial instrument that provides the recipient withDerivatives A complex financial instrument that provides the recipient with
the option to undertake an action
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