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FinancialModelingWorkshop
www.corporatebridge.net 1
Private and Confidential – Not for Circulation
Private and Confidential
Financial Modeling E-Book
FinancialModelingWorkshop
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Discussion topics
 Overview of Financial Modeling
 Excel Best Practices
 Modeling Warm Up
 Key Financial Statements
 Working Capital Schedule
 Depreciation Schedule
 Amortization Schedule
 Long Term Items (Others) Schedule
 Building Income Statement
 Shareholder’s Equity Schedule
 Shares Outstanding Schedule
 Preparing for Debt & Interest
 Trouble Shooting
 Completing the Financial Model
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.net
Introduction to Financial Modeling
 Simplified representation of performance
 Both past and future
 Blend of skills is required
 Understanding of the company’s (project’s) operations
 Accounting Knowledge
 Corporate Finance principles
 Excel (spreadsheet) techniques
 Different Types of Models
 Earnings model with projected earnings/ profits
 Debt/ Recapitalization/ Financing Model
 Merger Consequences model (Mergers/ Acquisitions/ Divestitures)
 Discounted Cash Flow models
 Utility of Financial modeling
 Virtual recreation of the actual business (need to understand the business logic)
 Ability to test assumptions to analyze impact on future performance
• Growth Rates
• Operating Margins
• Product lines/ business segments
• Refinancing/ recapitalization
 Understanding the purpose of the modeling in order to create the right design and functionality
Private and Confidential – Not for Circulation 3
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Assumptions – Importance in Financial modeling
 Need to have clear and well defined assumptions
 Referred to as ‘drivers’ or ‘inputs’ these are based on a thorough understanding of the business
 Assumptions should reflect business realities and expectations
 No bias should get into the assumptions on the business
 Always remember “GIGO” – Garbage In Garbage Out
 Use the past performance and a guide for future expectations
 Clearly understand the expected changes in future performance
 Understand Management expectations
 Check out what other analysts think about the company
 How to make Assumptions
 Past as an indicator of future performance, except in case of
• Start up situations
• Significant acquisitions or divesture activities
• Volatile industry structure
 Key tests a financial model should withstand
 Is it a reasonable model
 Can the assumptions/ model be defended
 Features of an effective model
 Should be realistic based on reasonable and defensible assumptions and projections
 Should be flexible and adaptable with dynamic working schedules (or modules)
 Should be easy to follow, should not intimidate the reader
Private and Confidential – Not for Circulation 4
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Excel Best Practices
 Maintain Consistency
 Makes understanding and constructing easier
 Consistent Color scheme makes life easy for self and others using the model
• BLUE for inputs (historical data, assumptions, drivers)
• BLACK for calculations and references on same schedule/ asset
• GREEN reference from another schedule/ sheet
• RED warnings to another user/ links to another model
 Clarity of presentation
 You should be able to understand the model when you revisit after some time lapse!
 More Important – Others should be able to understand!
 Be efficient
 Utilize excel to improve productivity
 Do Not hard code in formulae cells
 Separate line items are always useful
Private and Confidential – Not for Circulation 5
XX
√√
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Excel Best Practices
 Be efficient
 Do not input same numbers twice. Also, Excel takes care of formatting!
 Never Hide rows or columns – its useful to group them instead (Data -> Group)
 Set up the first sheet as a template for a complete worksheet using Page Set Up
• Use Edit -> Move/ Copy Sheet to create as many sheets as required in the model
• Take care as named cells will be duplicated in the new sheet
Private and Confidential – Not for Circulation 6
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Modeling Warm Up!
 Use a Modular Approach
 Core Statements – Income Statement, Balance Sheet, Cash Flow Statements
• Focus on Others
 Prepare supporting schedules
• Do all the “dirty” work
• Use them as a conduit between core schedules
• Export the supporting schedules to the core statements on completion
 Balance Sheet and Cash Flow Statements
• All projections need to be referenced from Schedules
Private and Confidential – Not for Circulation 7
Working Capital
Plant & Machinery,
Depreciation
Intangibles,
Amortization
Income
Statement
Cash Flow
Statement
Balance
Sheet
Debt &
Interest
Shareholder’s
Equity
Other LT
Items
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Things to Remember
 Historical data as a guide for projections
 Aim at projecting future performance
 Remember you are an Analyst and not an Auditor!
 Do not get worked up if historicals do not reconcile (its quite common!)
 Reasonable and Defensible set of Assumptions and Projections
 Models need to be efficient and clear
 A bad model is difficult to follow and audit
 A good model should be easy to follow and focus on key drivers
 Use Beta testing
 Test the logic after inputting right or down – check for flow
 Challenge each assumption with the following
 How does the model behave if you increase the assumption?
 What is a impact if the assumption is decreased?
 Try making the assumption equal to Zero
 What if the sign of the assumption changes?
Private and Confidential – Not for Circulation 8
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Key Financial Statements - Overview
 Create the line items
 Income Statement
 Balance Sheet
 Cash Flow Statement
 Income Statement
 Historical information
 Project Revenue and Operating expenses (Sales to EBITDA)
 Balance Sheet
 Historical data only
Private and Confidential – Not for Circulation 9
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Income Statement - Sample
Private and Confidential – Not for Circulation 10
 Setting up the Income Statement
 Sources for appropriate line items – financial statements,
management guidance and research
 Incorporate detailed line items to suit the business under analysis
 Ensure the income statement represents the company/ industry
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Balance Sheet - Sample
Private and Confidential – Not for Circulation 11
 Setting up the Balance Sheet
 Sources for appropriate line items – financial statements,
management guidance and research
 Simplify or expand line items to sit the analytical objective
 Modify as required to represent the company/ industry
FinancialModelingWorkshop
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Cash Flow Statement - Sample
Private and Confidential – Not for Circulation 12
 Setting up the Cash Flow Statement
 Past allowances are usually not made – historical cash flow
statements are often difficult to reconcile
 Ensure the columns are consistent with the Income
Statement and the Balance Sheet
 Standard layouts are useful for references from other
schedules
FinancialModelingWorkshop
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Income Statement - Sample
Private and Confidential – Not for Circulation 13
 Input past information in the Income
Statement
 Normalize for any non-recurring items
 Ensure to make notes as necessary
 Calculate historical ratios & growth rates
 Do not forget formatting!
Inputs are in Blue
Calculations in Black
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Income Statement - Sample
Private and Confidential – Not for Circulation 14
 Forecast net sales for future years
 Drivers: forecasted annual sales growth
 Sources: management guidance, research,
past trends
 Challenge assumptions for being reasonable
 Footnote all sources for assumptions
Only one blue input
cell if constant
growth is assumed
Forecasted figures
Drivers based on
input assumptions
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Income Statement - Sample
Private and Confidential – Not for Circulation 15
 Forecast future operating expenses
 Drivers: margin assumptions for future operations
 Sources: management guidance, research, past trends
 Challenge assumptions for being reasonable
 Other Expense/ (Income) is usually a number based on research/ past trends (but
not in % terms like other specific line items)
 Calculate till EBITDA. Depreciation & Amortization will be referenced from schedules
to be built in model
Drivers
Calculations
Inputs from research/ past trends
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Balance Sheet - Sample
Private and Confidential – Not for Circulation 16
 Input past information for the Balance Sheet
 Check if past Balance Sheets are balancing
 If combining line items into one item, make
sure not to miss out any items
Its practical to show
2 condensed debt
items
Inputs are in Blue
Calculations in Black
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Illustrative Flow of Funds
Private and Confidential – Not for Circulation 17
Income
Statement
Cash Flow
Statement
Balance
Sheet
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule
 Working Capital Overview
 Create the working capital line items
 Reference the historical balances
 Calculate past ratios related to working capital items
 Project future working capital by each line item
 Calculate projected cash flows generated out of working capital items
 Link with balance sheet & cash flow statement work sheets
Private and Confidential – Not for Circulation 18
 Setting up the Working Capital Schedule
 Ensure clarity by using the same working capital line items in the
same order in the balance sheet
 Reference Net Sales & Cost of Goods Sold from the Income Statement
– these are the drivers for working capital line items
Referenced from Income Statement
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule - Sample
 Reference the past data from the balance sheet
 Calculate net working capital
 Arrive at increase/ decrease in working capital
Private and Confidential – Not for Circulation 19
Calculations
Referenced from BS
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule - Sample
 Calculate historical ratios and percentages
 Use the ending or average balance
 Both are acceptable as long consistency is maintained
Private and Confidential – Not for Circulation 20
Calculations
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule - Sample
 Assumptions for future working capital items
 Certain items without an obvious driver are usually assumed at
constant amounts
 Ensure assumptions are reasonable and in line with the business
Private and Confidential – Not for Circulation 21
Assumptions
References,
if constant
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule - Sample
Private and Confidential – Not for Circulation 22
 Use the future ratios and assumptions to project the
forecasted working capital balances
Drivers
Drivers
Projections
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Working Capital Schedule - Sample
Private and Confidential – Not for Circulation 23
Calculations
Check and make sure
the signs match!
 Arrive at Cash Flows based on individual line items
 Ensure signs are accurate!
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Balance Sheet - Sample
 Link up the forecasted Working Capital to the Balance Sheet
Private and Confidential – Not for Circulation 24
Referenced from
Working Capital Schedule
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Cash Flow Statement - Sample
 Link up the forecasted Working Capital cash flows with the Cash Flow Statement
Private and Confidential – Not for Circulation 25
Referenced from
Working Capital Schedule
FinancialModelingWorkshop
All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net
Illustrative Flow of Funds
Private and Confidential – Not for Circulation 26
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
Working Capital Schedule

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Financial Modeling

  • 1. All Rights Reserved. Corporate Bridge TM FinancialModelingWorkshop www.corporatebridge.net 1 Private and Confidential – Not for Circulation Private and Confidential Financial Modeling E-Book
  • 2. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netPrivate and Confidential – Not for Circulation 2 Discussion topics  Overview of Financial Modeling  Excel Best Practices  Modeling Warm Up  Key Financial Statements  Working Capital Schedule  Depreciation Schedule  Amortization Schedule  Long Term Items (Others) Schedule  Building Income Statement  Shareholder’s Equity Schedule  Shares Outstanding Schedule  Preparing for Debt & Interest  Trouble Shooting  Completing the Financial Model
  • 3. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.net Introduction to Financial Modeling  Simplified representation of performance  Both past and future  Blend of skills is required  Understanding of the company’s (project’s) operations  Accounting Knowledge  Corporate Finance principles  Excel (spreadsheet) techniques  Different Types of Models  Earnings model with projected earnings/ profits  Debt/ Recapitalization/ Financing Model  Merger Consequences model (Mergers/ Acquisitions/ Divestitures)  Discounted Cash Flow models  Utility of Financial modeling  Virtual recreation of the actual business (need to understand the business logic)  Ability to test assumptions to analyze impact on future performance • Growth Rates • Operating Margins • Product lines/ business segments • Refinancing/ recapitalization  Understanding the purpose of the modeling in order to create the right design and functionality Private and Confidential – Not for Circulation 3
  • 4. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Assumptions – Importance in Financial modeling  Need to have clear and well defined assumptions  Referred to as ‘drivers’ or ‘inputs’ these are based on a thorough understanding of the business  Assumptions should reflect business realities and expectations  No bias should get into the assumptions on the business  Always remember “GIGO” – Garbage In Garbage Out  Use the past performance and a guide for future expectations  Clearly understand the expected changes in future performance  Understand Management expectations  Check out what other analysts think about the company  How to make Assumptions  Past as an indicator of future performance, except in case of • Start up situations • Significant acquisitions or divesture activities • Volatile industry structure  Key tests a financial model should withstand  Is it a reasonable model  Can the assumptions/ model be defended  Features of an effective model  Should be realistic based on reasonable and defensible assumptions and projections  Should be flexible and adaptable with dynamic working schedules (or modules)  Should be easy to follow, should not intimidate the reader Private and Confidential – Not for Circulation 4
  • 5. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Excel Best Practices  Maintain Consistency  Makes understanding and constructing easier  Consistent Color scheme makes life easy for self and others using the model • BLUE for inputs (historical data, assumptions, drivers) • BLACK for calculations and references on same schedule/ asset • GREEN reference from another schedule/ sheet • RED warnings to another user/ links to another model  Clarity of presentation  You should be able to understand the model when you revisit after some time lapse!  More Important – Others should be able to understand!  Be efficient  Utilize excel to improve productivity  Do Not hard code in formulae cells  Separate line items are always useful Private and Confidential – Not for Circulation 5 XX √√
  • 6. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Excel Best Practices  Be efficient  Do not input same numbers twice. Also, Excel takes care of formatting!  Never Hide rows or columns – its useful to group them instead (Data -> Group)  Set up the first sheet as a template for a complete worksheet using Page Set Up • Use Edit -> Move/ Copy Sheet to create as many sheets as required in the model • Take care as named cells will be duplicated in the new sheet Private and Confidential – Not for Circulation 6
  • 7. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Modeling Warm Up!  Use a Modular Approach  Core Statements – Income Statement, Balance Sheet, Cash Flow Statements • Focus on Others  Prepare supporting schedules • Do all the “dirty” work • Use them as a conduit between core schedules • Export the supporting schedules to the core statements on completion  Balance Sheet and Cash Flow Statements • All projections need to be referenced from Schedules Private and Confidential – Not for Circulation 7 Working Capital Plant & Machinery, Depreciation Intangibles, Amortization Income Statement Cash Flow Statement Balance Sheet Debt & Interest Shareholder’s Equity Other LT Items
  • 8. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Things to Remember  Historical data as a guide for projections  Aim at projecting future performance  Remember you are an Analyst and not an Auditor!  Do not get worked up if historicals do not reconcile (its quite common!)  Reasonable and Defensible set of Assumptions and Projections  Models need to be efficient and clear  A bad model is difficult to follow and audit  A good model should be easy to follow and focus on key drivers  Use Beta testing  Test the logic after inputting right or down – check for flow  Challenge each assumption with the following  How does the model behave if you increase the assumption?  What is a impact if the assumption is decreased?  Try making the assumption equal to Zero  What if the sign of the assumption changes? Private and Confidential – Not for Circulation 8
  • 9. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Key Financial Statements - Overview  Create the line items  Income Statement  Balance Sheet  Cash Flow Statement  Income Statement  Historical information  Project Revenue and Operating expenses (Sales to EBITDA)  Balance Sheet  Historical data only Private and Confidential – Not for Circulation 9
  • 10. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Income Statement - Sample Private and Confidential – Not for Circulation 10  Setting up the Income Statement  Sources for appropriate line items – financial statements, management guidance and research  Incorporate detailed line items to suit the business under analysis  Ensure the income statement represents the company/ industry
  • 11. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Balance Sheet - Sample Private and Confidential – Not for Circulation 11  Setting up the Balance Sheet  Sources for appropriate line items – financial statements, management guidance and research  Simplify or expand line items to sit the analytical objective  Modify as required to represent the company/ industry
  • 12. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Cash Flow Statement - Sample Private and Confidential – Not for Circulation 12  Setting up the Cash Flow Statement  Past allowances are usually not made – historical cash flow statements are often difficult to reconcile  Ensure the columns are consistent with the Income Statement and the Balance Sheet  Standard layouts are useful for references from other schedules
  • 13. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Income Statement - Sample Private and Confidential – Not for Circulation 13  Input past information in the Income Statement  Normalize for any non-recurring items  Ensure to make notes as necessary  Calculate historical ratios & growth rates  Do not forget formatting! Inputs are in Blue Calculations in Black
  • 14. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Income Statement - Sample Private and Confidential – Not for Circulation 14  Forecast net sales for future years  Drivers: forecasted annual sales growth  Sources: management guidance, research, past trends  Challenge assumptions for being reasonable  Footnote all sources for assumptions Only one blue input cell if constant growth is assumed Forecasted figures Drivers based on input assumptions
  • 15. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Income Statement - Sample Private and Confidential – Not for Circulation 15  Forecast future operating expenses  Drivers: margin assumptions for future operations  Sources: management guidance, research, past trends  Challenge assumptions for being reasonable  Other Expense/ (Income) is usually a number based on research/ past trends (but not in % terms like other specific line items)  Calculate till EBITDA. Depreciation & Amortization will be referenced from schedules to be built in model Drivers Calculations Inputs from research/ past trends
  • 16. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Balance Sheet - Sample Private and Confidential – Not for Circulation 16  Input past information for the Balance Sheet  Check if past Balance Sheets are balancing  If combining line items into one item, make sure not to miss out any items Its practical to show 2 condensed debt items Inputs are in Blue Calculations in Black
  • 17. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Illustrative Flow of Funds Private and Confidential – Not for Circulation 17 Income Statement Cash Flow Statement Balance Sheet
  • 18. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule  Working Capital Overview  Create the working capital line items  Reference the historical balances  Calculate past ratios related to working capital items  Project future working capital by each line item  Calculate projected cash flows generated out of working capital items  Link with balance sheet & cash flow statement work sheets Private and Confidential – Not for Circulation 18  Setting up the Working Capital Schedule  Ensure clarity by using the same working capital line items in the same order in the balance sheet  Reference Net Sales & Cost of Goods Sold from the Income Statement – these are the drivers for working capital line items Referenced from Income Statement
  • 19. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule - Sample  Reference the past data from the balance sheet  Calculate net working capital  Arrive at increase/ decrease in working capital Private and Confidential – Not for Circulation 19 Calculations Referenced from BS
  • 20. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule - Sample  Calculate historical ratios and percentages  Use the ending or average balance  Both are acceptable as long consistency is maintained Private and Confidential – Not for Circulation 20 Calculations
  • 21. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule - Sample  Assumptions for future working capital items  Certain items without an obvious driver are usually assumed at constant amounts  Ensure assumptions are reasonable and in line with the business Private and Confidential – Not for Circulation 21 Assumptions References, if constant
  • 22. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule - Sample Private and Confidential – Not for Circulation 22  Use the future ratios and assumptions to project the forecasted working capital balances Drivers Drivers Projections
  • 23. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Working Capital Schedule - Sample Private and Confidential – Not for Circulation 23 Calculations Check and make sure the signs match!  Arrive at Cash Flows based on individual line items  Ensure signs are accurate!
  • 24. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Balance Sheet - Sample  Link up the forecasted Working Capital to the Balance Sheet Private and Confidential – Not for Circulation 24 Referenced from Working Capital Schedule
  • 25. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Cash Flow Statement - Sample  Link up the forecasted Working Capital cash flows with the Cash Flow Statement Private and Confidential – Not for Circulation 25 Referenced from Working Capital Schedule
  • 26. FinancialModelingWorkshop All Rights Reserved. Corporate Bridge TM www.corporatebridge.netwww.corporatebridge.net Illustrative Flow of Funds Private and Confidential – Not for Circulation 26 Income Statement Cash Flow Statement Balance Sheet Working Capital Sales COGS Change in WC Working Capital Working Capital Schedule