As a business analysts or a consultant you will have to from time to time create financial models. There are a bit different than business models. In business models you go into details of operations and you focus on getting the links on the KPIs. Those models are usually done for internal purposes, to manage in the right direction the business. Financial models on the other hand are more for external users. You concentrate in them on creating the picture of the business in a standardized, understood by everybody way. You also want to create the financial statements: profit & loss statement, balance sheet statement, cash flow statement.
On top of that you use the financial statements for valuation purposes.
The most typical situation when, as a business analyst or a consultant, you will have to prepare such a model are connected with selling or purchasing a company. You may be doing it on the sell side or on the buy side. Financial modeling is done as a part of strategy projects, turn around projects, due diligence.
I will NOT teach you everything on financial modelling because it is simply not efficient (and frankly you don’t need it). This course is organized around 80/20 rule and I want to teach you the most useful (from business analyst / consultant perspective) ways to go as fast as possible from rough description to working model in Excel that you can make more and more complicated.
The aim of this course is that you are able to do a financial model of the business as fast as possible.
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
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
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
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
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
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
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
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
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
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
50. 50
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
51. 51
Let’s go to next section
Profit and Loss
modelling
Capex and
Depreciation
Working Capital
Debt
AnalysesCash flow modeling
Balance sheet
modeling
Equity
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
55. 55
Let’s go to next section
Profit and Loss
modelling
Capex and
Depreciation
Working Capital
Debt
AnalysesCash flow modeling
Balance sheet
modeling
Equity
57. 57
In a separate sheet we model all the relations with the
owners like dividend policies, contribution to be paid, etc.
58. 58
Let’s go to next section
Profit and Loss
modelling
Capex and
Depreciation
Working Capital
Debt
AnalysesCash flow modeling
Balance sheet
modeling
Equity
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
66. 66
Let’s go to next section
Profit and Loss
modelling
Capex and
Depreciation
Working Capital
Debt
AnalysesCash flow modeling
Balance sheet
modeling
Equity
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
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
76. 76
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
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
82. 82
Check my extensive presentation on productivity hacks to see
how you can me 10x more productive
Management consultant
productivity hacks
How to be lazy and still get things done
presentation
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
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Check my presentation on on-line models to understand
them properly
On-line Business Modesl
A practical guide
presentation
87. 87
Check my presentation on starting and running consulting
company
Start and run consulting
company
A practical guide
presentation
88. 88
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businesses
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idea without building the
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