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modelling
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Course aims
This course follows on from Tykoh Training’s
two day Financial Modelling workshop
The course content aims to be
– Advanced
– Relevant / applicable to a range of areas
– Compact (i.e. single worksheet examples)
– In a form that can be covered quickly
1
Course benefits / “take-aways”
i) Specific problems / models we cover
Resource Growth
Utilisation
Capacity
planning
Slice &
Dice
Due vs
received
... ...
New model
2
Course benefits / “take-aways”
iii) Applying design skills to develop new
types of models
Description of task /
problem to solve
New model
Course content
Overview
– Brief description of the modelling problem being
solved
Assumptions
– Key inputs / assumptions in the model
Outputs
– Main outputs / charts / tables
3
Course content
Challenges
– “Tricky” or difficult parts of the problem
Framework
– Guidelines for solving the problem
Applications
– List of the techniques use in the model and other
examples of where the techniques can be applied
4
Growth analysis - assumptions
A table defines yearly business growth
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Growth analysis - assumptions
The cost per staff grows at a defined rate
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Growth analysis - outputs
Chart showing volume growth assumption
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Growth analysis - outputs
Forecast business volume, staff numbers
and costs
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8
Growth analysis - challenges
Avoid “hard-coding” particular columns for
special purposes (e.g. end-of-year, first-
period of year)
Ensure that annual staff costs are
independent of the reporting period (e.g.
annual staff costs should be the same
whether periods are quarterly, monthly or
annually).
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Growth analysis - framework
Use EOMONTH to generate period end
dates
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Growth analysis - framework
If business volume grows at 10% per year
then what is semi-annual growth?
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Growth analysis - framework
.. and only two on a semi-annual basis
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Due vs received - overview
Debts (due to us) become periodically
payable
Debts are of three classes (A, B, C)
The classes differ in terms of how quickly
they are paid
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Due vs received - overview
20% of “A” debt, 20% of “B” and 25% of “C”
is received in the second period ...
– .. and so on
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Due vs received - assumptions
Debt payment profile
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Due vs received - outputs
Chart of debt falling due
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Due vs received - outputs
Chart of total due and forecast receipts
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Due vs received - challenges
Need to be clear and simple about KPI
definition and how to calculate it – otherwise
end up with very complicated logic.
Need to be efficient in calculating KPIs over
1, 2 and 3 periods and avoid duplicating
calculations.
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Due vs received - framework
Forecasting receipts Period Due Receipts
– Suppose in period 2 an 1 100
additional debt of 300 2 300 10
becomes due.
3 20 + 30
– The schedule of receipts
is as shown to the right. 4 30 + 60
– The figures in italics 5 40 + 90
result from the second, 6 120
300, debt and the
unitalicised figures result
from the first, 100, debt.
- In general, receipts in period n will equal 10% of debt that
falls due in period n-1 plus 20% of debt that falls due in
period n-2 plus 30% of debt that falls due in period n-3 and
40% of debt that falls due in period n-4.
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Due vs received - framework
Forecasting KPI (cont)
– Suppose the debt payment profile of debt classes
A, B and C is as shown in the following table.
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Due vs received - framework
Projected receipts within two periods are 30
+ 120 + 180 = 330.
Debt falling due in this period is 100 + 200 +
400 = 700.
So the two-period KPI is 330÷700 = 47%
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Input
Process
Output
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Due vs received - applications
By using a technique called “convolution”
(implemented in the model) we can predict
the output for a complex input (e.g. one of
this form):
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Capacity analysis - assumptions
Demand has a certain seasonality and
superimposed on that is a longer-term growth
factor.
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Capacity analysis - assumptions
Spare capacity incurs a per-period cost
proportional to the amount of spare capacity.
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Increment
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Capacity analysis - assumptions
Before capacity is reduced a “minimum
holding period” must elapse since the last
increase or decrease.
Minimum
holding period
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Capacity analysis - challenges
Avoid introducing circular logic
– Decisions about increasing or decreasing
capacity depend on demand and capacity. But, in
turn, capacity depends on the decisions made
about increasing or decreasing it.
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Capacity analysis - framework
New capacity
– If capacity is to be increased or decreased then it
should be set to the current demand plus the
capacity threshold
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Slice and dice - overview
Data (population in this case) evolves over
time.
– The forecast data is to be segmented and
projected in various ways
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...
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Slice and dice - assumptions
Mortality rates have a given age distribution
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Slice and dice - outputs
Population distribution in 2010, 2020 & 2030
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Slice and dice - outputs
Percentage population older than “n” years
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Slice and dice - outputs
Age distribution over the period 2010 - 2030
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Slice and dice - framework
Calculating next year’s population distribution
– The number of, say, 32 year olds at the end of
this year will be the number of 31 year olds at the
end of last year plus net immigration of 32 year
olds this year less the number of 32 year olds that
die during this year.
– The number of 0-1 year olds at the end of this
year will be the total population last year times the
birth rate per population plus net immigration of 0-
1 year olds less the number of 0-1 year olds that
die during this year.
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Slice and dice - framework
Converting between five-yearly and one-
yearly intervals (cont).
– Suppose we work with 5 yr intervals.
– Suppose there are no births or immigration for 5
years.
– Each year we remove one fifth of the preceding
year’s population of 0-4 year olds.
– In five years we’ll have 4/5* 4/5 * 4/5 * 4/5 * 4/5 = 33%
of the original population remaining.
– But the correct answer is 0%.
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0 1 2 3 4
2010 : 2 2 2 2 2
0-4
2011 :
2012 :
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Slice and dice - applications
Modelling activities that have demographic
sensitivities
Generating 3-D charts showing the evolution
of a distribution over time
Determining the mean and cumulative values
of a distribution
Regrouping ordered data into larger or
smaller intervals
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Resource utilisation - overview
Given a schedule of resource demands and
a resource capacity forecast how those
resources will be applied, backlogs, service
times etc.
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Resource utilisation - outputs
Chart of resources required, resources
provided and backlog
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Resource utilisation - outputs
Chart of peak backlog as a function of
resources available
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Resource utilisation - outputs
Chart of service time as a function of
resource utilisation
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Resource utilisation - challenges
– The trickiest part of the exercise is to calculate
service times. This is best done by calculating the
times at which cumulative resources provided
match or exceed cumulative resources requested.
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Resource utilisation - framework
Calculating backlogs
– The backlog of 2 carries over into period 2. An
additional 3 resources are required. So those 3
resources are applied first to the backlog of 2 and
then service the first of the three units or work
requested in period 2. The last two unit carry over
as a backlog into period 3.
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Resource utilisation - framework
Calculating backlogs
– The general formula for calculating the backlog in
period j is this
– Bj = Bj-1 + Rj - Pj
– where Bj = backlog in period j
– Bj -1 is the backlog carried over from period j-1
– Rj is the resource requested in period j
– and Pj is the resource provided in period j
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Resource utilisation - framework
Calculating service times - Example
– 5 resources are required at period 1. Cumulative
resources required then are also 5. At period 2
cumulative resources provided are 6. That
number exceeds 5 so that is the time when the
service requested at period 1 is complete.
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Resource utilisation - applications
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