1. CONSULTING TOOLKIT
Consulting Skills:
Modelling
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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 answer
020910 Chris Doran
© 2007-2012 IES Development Ltd. All Rights Reserved 1

3. Build your valuation model in logical steps, debugging at every
stage
STEPS IN BUILDING A VALUATION MODEL
1) Enter 3 years of historical cashflow, P&L and balance sheet
2) Calculate key drivers/ratios of historical results
3) Project flat “vanilla” assumptions for key ratios
4) Calculate projected cashflow, P&L and balance sheet
5) Debug your model – check you get sensible number
6) Develop a “story’ on the future of the industry/business
7) Turn your story into different financial assumptions on the key drivers
8) Sense check your FCF
9) Calculate Terminal values, enterprise value, equity value
10) Compare equity value to current market capitalisation
11) Run sensitivities
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4. Build a FCF forecast in a logical sequence
STEPS 1-4: BUILDING A “VANILLA” VALUATION MODEL
CASHFLOW 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 1,248
ASSUMPTIONS
ASSUMPTIONS
New 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
20
Other capex spend DRIVERS/ 78 121
57 RATIOS 140 DRIVERS/RATIOS (Input422
157 209 271 335 data)510
Like for like sales growth, % 2% 0% -3% 2% 2% 2% 2% 2% 2% 2%
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5. The more you practice, the better you will get at modeling
GENERAL 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)
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6. Always remember the purpose of your model to avoid getting
paralysed by detail
THE 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
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