Diese Präsentation wurde erfolgreich gemeldet.
Die SlideShare-Präsentation wird heruntergeladen. ×

Best practices in financial modeling

Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
Anzeige
© Pristine For Webinar-Best Practices in Financial Modeling (Confidential)
© Pristine – www.edupristine.com
Best Practices...
© Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1
Agenda
 Modeling depleting items
 Consisten...
© Pristine For Webinar-Best Practices in Financial Modeling (Confidential)
Key concepts
I. Scalability
II. Robustness
III....

YouTube-Videos werden auf SlideShare nicht mehr unterstützt.

Original auf YouTube ansehen

Wird geladen in …3
×

Hier ansehen

1 von 23 Anzeige

Best practices in financial modeling

Herunterladen, um offline zu lesen

Agenda:
Modeling depleting items
Consistency in the format
Modeling the Taxes
Modeling of Debt and Cash Balances
Edupristine offers Financial Modeling Course in US a practical approach for financial analysts to come to the business valuation of any organization
More info take a look at:http://www.edupristine.com/ca/courses/financial-modeling/

Agenda:
Modeling depleting items
Consistency in the format
Modeling the Taxes
Modeling of Debt and Cash Balances
Edupristine offers Financial Modeling Course in US a practical approach for financial analysts to come to the business valuation of any organization
More info take a look at:http://www.edupristine.com/ca/courses/financial-modeling/

Anzeige
Anzeige

Weitere Verwandte Inhalte

Diashows für Sie (20)

Andere mochten auch (18)

Anzeige

Ähnlich wie Best practices in financial modeling (20)

Weitere von 13 Llama Interactive (20)

Anzeige

Aktuellste (20)

Best practices in financial modeling

  1. 1. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) © Pristine – www.edupristine.com Best Practices in Financial Modeling Webinar 1
  2. 2. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1 Agenda  Modeling depleting items  Consistency in the format  Modeling the Taxes  Modeling of Debt and Cash Balances
  3. 3. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) Key concepts I. Scalability II. Robustness III. Modeling cash balance and debt IV. Modeling Taxes 2
  4. 4. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) Introduction  Financial modeling is the building of a mathematical model that helps in financial decision- making situations  It is a skill widely used in the financial services  Building a financial model is a challenging task and often simple mistakes can lead to major losses for both the firm and their client  In this series we take you through some of the common mistakes that are committed by analysts when preparing financial models and the best practices to make a robust and scalable financial model 3
  5. 5. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1. Modeling depleting items  Depleting items (at constant rate) should be modeled with caution  Use “min” function to cap the depletion  For example depreciation, debt repayment should be modeled with usage of MIN function so that the value in a year is the depletion rate or the balance amount whichever is lower 4
  6. 6. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1.1 Common mistake 5 No Capex, asset is depreciated by straight line method @ 30%, depreciation formula and linkage is correct but it has not been capped  On dragging to the next column, the formula for depreciation remains correct but the Net Block turns negative.  Depreciation in FY17 can’t be greater than the residual value in the previous year
  7. 7. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1.2 Correct modeling technique 6 Depreciation should be capped using MIN function. It should be the minimum of the residual value from previous year and normal depreciation On dragging to the next column, the depreciation is now restricted to the residual value at the end of the previous year. Net Block is zero now
  8. 8. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 2. Consistency in the format  It is important to maintain the consistency in the format of modeling across all the items • Separate headings, sub headings etc. by different font size and row colors. Maintain consistency of formatting scheme across the model • Report a particular year in the same column across sheets. For example, if FY17 has been reported in Column G on P&L sheet, it should be reported in the same column across all the sheets (assumption, balance sheet, build up, cash flow, valuation etc) 7
  9. 9. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 2.1.1 Common mistakes 8 P&L has been rolled out laterally i.e. years changing column wise debt amortization schedule is rolled out vertically where years are changing across rows
  10. 10. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 2.1.2 Common mistakes 9 Since the format is transposed, dragging the interest expense laterally forces Excel to pick up the incorrect value placed laterally adjacent to the cell D16, while we actually wanted the value D17
  11. 11. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 2.2 Correct modeling technique 10 Had the format been kept consistent, draggi ng to the next column would have picked up the value from the correct cell
  12. 12. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 3. Calculating taxes  A model is robust if it does not break down when assumptions are changed from one end of the spectrum to another • A frequently noticed error in this category is incorrect / inconsistent tax computation if assumptions are changed such that PBT changes sign from positive to negative • Another frequently noticed error is that balance sheet starts showing negative cash if capital expenditure in a year is doubled or tripled.  Ensure all the possible scenarios are modeled. For example, if tax is modeled simply as • Tax = Tax Rate x PBT • Or Tax = if (PBT <0, 0, Tax Rate x PBT) • Your model will break down in case PBT is negative for a few years in succession. It will not return the benefit of accumulated losses. 11
  13. 13. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 3.1 Common Mistake 12 Look at the formula. The formula for taxes and the linkage to the cell is correct. However the formula does not take into account the case of a negative EBT In this case our formula handles the condition when PBT is negative but however does not give us the benefit of carrying forward our losses
  14. 14. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 3.2 Correct modeling technique 13 No tax due to negative PBT Benefit of accumulated losses, only earnings in excess of accumulated losses (= USD 2 Mn) is taxed Tax = IF (PBT<0, 0, IF (Cum PBT<0, 0, Tax rate x MIN(PBT, Cum PBT)
  15. 15. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 4. Modeling of Debt and Cash Balances  Another common error in modeling is not to link debt balances with cash balance  Any drastic change in assumption may make the cash flow during the year highly negative wiping out previous balances, the closing cash balance on the balance sheet will turn negative  Provision for shortfall should always be incorporated in model  Model should automatically draw more debt to make up for the shortfall and bring the cash balance back to threshold level 14
  16. 16. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 4.1.1 Common mistake 15 No provision for shortfall in cash, no protection against cash balance going negative Suppose Capex in FY15 is now increased to $10 million.
  17. 17. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 4.1.2 Common Mistake 16 As soon as Capex in changed, cash balance on the balance sheet turns negative and our model breaks down
  18. 18. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 4.2.1 Correct modeling technique 17 Instead, model the provision for shortfall so that the model draws down additional debt if shortfall in cash is expected
  19. 19. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 4.2.2 Correct modeling technique 18 Now see the impact of changing capex, model automatically draws additional debt to restore cash balance to threshold level – induces robustness in model
  20. 20. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) Summary Today we’ve learnt some common mistakes that can and should be avoided when modeling in Excel  Model must be made scalable by protecting the formula with dollar referencing  “MIN” function should be used to cap the depletion when depleting items like depreciation are modeled  It is important to maintain the consistency in the format of modeling across all the items  A sound financial model must be able to handle all boundary conditions. For e.g. when calculating taxes, we should check for a negative PBT and model loss carryforward in case of consecutive years of negative PBT  When modeling cash and debt balances, a provision for shortfall in cash should always be incorporated in model 19
  21. 21. © Pristine For Webinar-Best Practices in Financial Modeling (Confidential) Thank you! © Pristine – www.edupristine.com

×