A financial model is a quantitative representation of a business's financial information that can be used to forecast the future, value a security, determine the benefits of a merger, and answer "what if" questions. It models relationships between variables in mathematical terms. Creating a financial model involves defining inputs and outputs, structuring cash flow projections over multiple years, and identifying risks. The model benefits businesses by identifying weaknesses, optimizing profits, evaluating risks, and saving time in documentation.

1. W E B I NA R # 3
J U N E 2 7, 2 01 3
How to Create a Comprehensive
Financial Model

2. What is a Financial Model?
A quantitative representation of financial
information, from e.g. a
business, organization or branch of
government
It is used by the financial analyst and may be
constructed for many purposes including:
 valuation of a security
 forecasting future raw material need
 determining benefits of a takeover or merger.

3. What is a Financial Model?
 A financial model is designed to represent in
mathematical terms the relationships
among the variables of a financial problem
so that it can be used to answer "what if"
questions or make projections.

4. What is a Financial Model?
 A model is a simplified representation of a
situation or problem and modeling is the
process of building, refining and analyzing
that representation for greater insight and
improved decision making.
(Source: Mastering Financial Modeling – Financial Times series)

5. Why Create a Model?
 A tool to assist you to forecast when you will
start to generate revenue and how much you
will need to spend to get there.
 Allows you to predict and continuously
modify the assumptions (with a great deal of
flexibility) underpinning the financial
performance of your business.

6. Why Create a Model?
 To present your business to potential
investors or other partners - reasonably
identify how much the company will need to
spend in the early phases to achieve a level of
income in excess of expenditure.
 The financial model can also be used to try
out new ideas and even test other business
models.

7. Tools necessary for forecasting
 Decide on software – Excel, VBA, Customized
or “off the shelf” programmes
 Cash Flow Projections
 Sales / Income
 Expenditure
 Variable Costs
 Operating Expenses
 Net Income
 Integrate with Business Plan / Business Model

8. Steps in Creating the Model
First Step:
Define and Structure the proposal
 Define why the model is needed and determine questions
that need to be answered
 Determine how accurate or realistic outputs will need to
be
 Quantify relationships among variables

9. Steps in Creating the Model
Second Step:
Define the input and output variables
 List all inputs and identify who will provide them
 You may use reasonable assumptions based on precedent
or established practices but avoid arbitrary guesswork
 Compile list of tabular, graphical or other outputs the
model will need to generate

10. Steps in Creating the Model
Third Step:
Determine who will use the model and frequency of
usage
 Consideration for level of detail
 User interface requirements

11. Cash Flow Projections
 Enter monthly revenue
 Enter monthly expenditure
 Variable costs
 Operating costs
 Debt servicing
 Calculate net income

12. Completing the process
 Risks
 Identify possible risks & show how mitigated
 Cash flow projections – (3 years)
 Income statement
 Balance sheet
 Opening statement or personal financial statement
 Projected balance sheet
 Funding Requirements
 State amount & type – debt or equity

13. Applications
Basis for sound business activities
Financial negotiations
Grant funding
Investment promotion
Feasibility studies
Due diligence analysis
Management reports

14. Benefits for Business
(Used in conjunction with Business Plan)
 Identify possible weaknesses in project concept and develop
improvements to mitigate effects of such weaknesses
 Optimize level of profitability / returns on project
 Identify and evaluate possible associated risks and their
quantitative impact
 Develop strategy to mitigate above risks
 Time saving in preparation of project documentation to
ensure compliance with evaluation criteria and process

15. Benefits for Business Owners
 Understand how personal and business strategies can work
together
 Explore liquidation opportunities and financial alternatives
before implementing change
 Explore options and alternatives that can add significant future
value
 Consolidate financial information for decision making
 Evaluate personal investments, estate planning and even
retirement strategies
 Examine possible exit strategies

16. Benefits for Professionals
 Maximize retirement benefit options
 Explore possible financial alternatives before implementing
change
 Gain better understanding of your financial circumstances
and direction
 Explore options and alternatives that may add future value
 Consolidate financial information to better enable timely and
well informed decisions
 Integrate executive compensation strategies with personal
investment, insurance, estate planning and retirement
planning

17. The End
Thank you!