Financial Modeling by Corporate Briddge

dheerajvaidya@corporatebridge.
net
www.cbacademy.in
Private and Confidential

Financial Modeling
Financial Modeling Training Program
Prepared by: Dheeraj Vaidya

CEO, Corporate Bridge Academy
dheerajvaidya@corporatebridge.net
1
www.cbacademy.in
Discussion topics
– Evening Session
 Overview of Financial Modeling

 Excel Best Practices
 Modeling Warm Up
 Key Financial Statements
FinanceModeling
 Working Capital Schedule

 Depreciation Schedule
 Amortization Schedule
 Long Term Items (Others) Schedule
Financial
 Building Income Statement

 Shareholder’s Equity Schedule
 Shares Outstanding Schedule
Corporate
 Preparing for Debt & Interest

 Trouble Shooting
 Completing the Financial Model
Sampel PPTs - Prepared for CLSA India (Pune) 2

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Introduction to Financial Modeling
Simplified representation of performance

– Evening Session

 Both past and future
 Blend of skills is required

 Understanding of the company‟s (project‟s) operations
 Accounting Knowledge
FinanceModeling
 Corporate Finance principles

 Excel (spreadsheet) techniques
 Different Types of Models

 Earnings model with projected earnings/ profits
Financial
 Debt/ Recapitalization/ Financing Model

 Merger Consequences model (Mergers/ Acquisitions/ Divestitures)
 Discounted Cash Flow models
 Utility of Financial modeling

Corporate
 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
3
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Assumptions – Importance in Financial modeling
Need to have clear and well defined assumptions

– Evening Session

 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
FinanceModeling
 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

Financial
 Past as an indicator of future performance, except in case of

• Start up situations
• Significant acquisitions or divesture activities
• Volatile industry structure
Corporate
 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

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Excel Best Practices
Maintain Consistency
– Evening Session

 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

FinanceModeling
• 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!
Financial
 More Important – Others should be able to understand!

 Be efficient
 Utilize excel to improve productivity
 Do Not hard code in formulae cells
Corporate
X
 Separate line items are always useful
Sampel
PrivatePPTs
and Confidential – Not
- Prepared for CLSA
for India
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(Pune) 5
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Excel Best Practices
Be efficient
– Evening Session

 Do not input same numbers twice. Also, Excel takes care of formatting!
FinanceModeling
 Never Hide rows or columns – its useful to group them instead (Data -> Group)
Financial
Corporate
 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
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Modeling Warm Up!
Use a Modular Approach

– Evening Session

 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
FinanceModeling
• Export the supporting schedules to the core statements on completion

 Balance Sheet and Cash Flow Statements
• All projections need to be referenced from Schedules
Financial
Income Debt &

Working Capital
Statement Interest
Corporate
Plant & Machinery, Cash Flow Shareholder’s

Depreciation Statement Equity
Intangibles, Balance Other LT

Amortization Sheet Items
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Things to Remember
Historical data as a guide for projections

– Evening Session

 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

FinanceModeling
 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

Financial
 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?
Corporate
 What is a impact if the assumption is decreased?

 Try making the assumption equal to Zero
 What if the sign of the assumption changes?
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Key Financial Statements - Overview
Create the line items

– Evening Session

 Income Statement
 Balance Sheet
 Cash Flow Statement
 Income Statement
FinanceModeling
 Historical information
 Project Revenue and Operating expenses (Sales to EBITDA)
 Balance Sheet
Financial
 Historical data only

Corporate
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Income Statement - Sample
Financial
Corporate – Evening Session
FinanceModeling
 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
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Balance Sheet - Sample
Financial
FinanceModeling
 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
Sampel
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Cash Flow Statement - Sample
– Evening Session
FinanceModeling
Financial
 Setting up the Cash Flow Statement

 Past allowances are usually not made – historical cash flow
Corporate
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
Sampel
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– Evening Session
Calculations in Black
FinanceModeling
Inputs are in Blue

Financial
Corporate
 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!
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– Evening Session
Forecasted figures
FinanceModeling
 Forecast net sales for future years

Financial
 Drivers: forecasted annual sales growth

 Sources: management guidance, research,
past trends
 Challenge assumptions for being reasonable
 Footnote all sources for assumptions
Corporate
Drivers based on
input assumptions
Only one blue input

cell if constant
growth is assumed
Sampel
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– Evening Session
Inputs from research/ past trends

FinanceModeling
 Forecast future operating expenses
 Drivers: margin assumptions for future operations

 Sources: management guidance, research, past trends
Financial
 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
Corporate
Drivers
Calculations
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– Evening Session
Calculations in Black
FinanceModeling
Inputs are in Blue

Financial
Its practical to show

2 condensed debt
items
Corporate
 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
Sampel
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Illustrative Flow of Funds
– Evening Session
Income
FinanceModeling
Statement
Cash Flow
Financial
Statement
Corporate
Balance
Sheet
Sampel
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Working Capital Schedule
Working Capital Overview

– Evening Session

 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
FinanceModeling
 Link with balance sheet & cash flow statement work sheets
Financial
Referenced from Income Statement

Corporate
 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
Sampel
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Working Capital Schedule - Sample
– Evening Session
FinanceModeling
Referenced from BS
Calculations
Financial
Corporate
 Reference the past data from the balance sheet

 Calculate net working capital
 Arrive at increase/ decrease in working capital
Sampel
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- Prepared for CLSA
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(Pune) 19
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– Evening Session
FinanceModeling
Financial
Calculations
Corporate
 Calculate historical ratios and percentages

 Use the ending or average balance
 Both are acceptable as long consistency is maintained
Sampel
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- Prepared for CLSA
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– Evening Session
FinanceModeling
References,
Assumptions if constant
Financial
Corporate
 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
Sampel
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– Evening Session
Drivers
FinanceModeling
Projections
Financial
Corporate
Drivers
 Use the future ratios and assumptions to project the

forecasted working capital balances
Sampel
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– Evening Session
FinanceModeling
Financial
Check and make sure

the signs match!
Corporate
Calculations
 Arrive at Cash Flows based on individual line items

 Ensure signs are accurate!
Sampel
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- Prepared for CLSA
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– Evening Session
FinanceModeling
Referenced from
Financial
Corporate
 Link up the forecasted Working Capital to the Balance Sheet
Sampel
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- Prepared for CLSA
for India
Circulation
(Pune) 24
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– Evening Session
FinanceModeling
Referenced from
Financial
Corporate
 Link up the forecasted Working Capital cash flows with the Cash Flow Statement
Sampel
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- Prepared for CLSA
for India
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– Evening Session
Sales
Income
FinanceModeling
COGS
Statement
Working Change in WC
Capital
Working Capital
Financial
Cash Flow
Statement
Corporate
Balance
Sheet
Sampel
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- Prepared for CLSA
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Debt and Interest
Income Statement – interest expense/ income are incomplete at this stage

– Evening Session

 Balance Sheet – cash and debt items are incomplete at this stage
 Cash Flow Statement –
 Calculate cash flow from operating and investing activities
FinanceModeling
 Calculate cash flow from available financing activities
 Calculate ending cash balance
 Link up with Balance Sheet

Financial
Corporate
Sampel
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The Cash Flow Statement
– Evening Session
Cash Flow from Operating Activities Cash Flow from Investing Activities
 Net Income  Capital Expenditures
 Add: Non Cash Charges/ Incomes

+  Add: Proceeds from Asset Sales
 Add: Change in Working Capital  Add: Additions to Intangibles

FinanceModeling
 Add: Change in LT assets/ liabilities  Add: Business Acquisitions
Free Cash Flow Available for

Financial
Financing Activities
Corporate
Cash Flow from Financing Activities

 Available Cash Flow is used for:
 Repayment of Debt, payment of dividend,
repurchase of equity, maintain higher
cash balances
 Cash flow deficit is funded by”

 Revolving debt, issuance of LT debt,
issuance of equity, cash balances
Sampel
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- Prepared for CLSA
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Circulation
(Pune) 28
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Change in Cash – Schematic Diagram
– Evening Session
Cash Flow from Operating Activities
+
FinanceModeling
Cash Flow from Operating Activities Net Cash Flow

Financial
+
 Add: Effects of Ex. Rates on Cash
Corporate
 Add: Previous year‟s Cash Balance

Cash Flow from Operating Activities  = Ending Cash Balance
Sampel
PrivatePPTs
- Prepared for CLSA
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(Pune) 29
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– Evening Session
Referenced from
Income Statement
FinanceModeling
Calculations
Financial
Corporate
 Link up Net Income to the Cash Flow Statement

 Calculate Cash Flow from Operating and Investing activities
 Calculate Cash Flow Available for Financing Activities
Sampel
PrivatePPTs
- Prepared for CLSA
for India
Circulation
(Pune) 30
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Financial
FinanceModeling
Calculations
 Calculate Cash Flow Available for Financing

Activities and Net Change in Cash
Sampel
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Financial
FinanceModeling
Reference from BS
 Reference “beginning cash balance” from the Balance Sheet
Sampel
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- Prepared for CLSA
for India
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– Evening Session
Excel reads
blank cells as Zero
FinanceModeling
Financial
Corporate
 Forecasted Cash is yet to be linked – this will be done later in the model
Sampel
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- Prepared for CLSA
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Financial
FinanceModeling
Calculations
 Calculate Ending Cash Balance
Sampel
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– Evening Session
Referenced
from Cash Flow
FinanceModeling
Financial
Corporate
 Link up “ending cash balance” to the Balance Sheet
Sampel
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- Prepared for CLSA
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Linking up the Core Statements

– Evening Session
Depreciation
FinanceModeling
Sales
COGS
Income
Statement
Shareholder’s
Capital Equity
Financial
Working Capital
Amortization
Cash Flow
Statement
Corporate
PP & E,
Depreciation
Amortization
Balance Other Long

Sheet Term Items
Intangibles,
Amortization Intangibles
Sampel
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- Prepared for CLSA
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(Pune) 36
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Debt and Interest - Schedule
Calculate Cash Flow Available for Debt Repayment

– Evening Session

 Reference in past information on Long Term Debt
 Make sure to enter the mandatory Long Term Repayments (refer to repayment schedule provided in
the Annual Report in the discussion on Debt Section)
 Calculate forecasted Long Term Debt Repayments

FinanceModeling
 Calculate Cash Flow Available for Revolver

 Revolver = Cash Sweep
 Calculate Interest Expense/ Income

 Refer to average debt balances
Financial
 Revolver interest expenses
 Long Term interest expenses
 Cash Balance for Interest/ Income

Corporate
 Link Up
 Forecasted interest expense/ income to Income Statement
 Forecasted debt repayments/ borrowings to Cash Flow Statement
 Forecast debt balances to the Balance Sheet
Sampel
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Debt and Interest Schedule - Sample
– Evening Session
Referenced
FinanceModeling
Financial
 Set up a Debt Schedule

 Reference the Cash Flow Available for Financing
 Reference all equity sources and uses of cash

Corporate
Sampel
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– Evening Session
Reference
FinanceModeling
Assumption
Calculations
Financial
 Calculate Cash Flow from Debt Repayment

 Reference the Beginning Cash Balance from the Balance
Sheet
 Deduct a minimum cash balance

Corporate
 Skip Long Term Debt Issuance/ Repayments, Cash

available for Revolving Credit Facility
and Revolver section for now
Sampel
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– Evening Session
FinanceModeling
Financial
Reference
Corporate
 Reference the historical long term debt balances from the Balance Sheet
Sampel
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- Prepared for CLSA
for India
Circulation
(Pune) 40
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– Evening Session
FinanceModeling
Financial
INPUTS from known debt maturities

Corporate
 Input the future debt repayments – fill in the known aggregate maturities
of long term debt
Sampel
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– Evening Session
FinanceModeling
References
Financial
Calculations
Corporate
 Forecast future debt balances

 Reference beginning balance
 Calculate forecast ending balance
Sampel
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- Prepared for CLSA
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– Evening Session
FinanceModeling
Financial
References & Calculations

Corporate
 Reference Long Term Debt Issuance and Long Term Debt (Repayments)
 Calculate Cash Available for Revolving Credit Facility
Sampel
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– Evening Session
FinanceModeling
Financial
References
Corporate
 Reference the past revolving credit facility balances from the Balance
Sheet
Private and Confidential – Not for Circulation 44

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– Evening Session
FinanceModeling
References
“Cash Sweep”
(use MIN logic)
Financial
Calculations
Corporate
 Set up the logic for the revolver – the cash sweep must be able to:
 Borrow if a cash flow deficit
 Pay down itself with free cash flow
 Stop at a „zero‟ balance
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– Evening Session
 Calculate interest expense from Revolver

 Calculate the average balance
 Make a reasonable assumption for an interest rate

FinanceModeling
 Forecast interest expense

Financial
Corporate
Assumption
Calculations
Sampel
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– Evening Session
 Calculate interest expense from the Long Term Debt


FinanceModeling
 Forecast the interest expense
 Calculate Total Interest Expense

Financial
Corporate
Assumption
Calculations
Sampel
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– Evening Session
 Calculate interest income from Cash Balances


FinanceModeling
 Forecast the interest income

Financial
Corporate
Calculations
Assumption
Sampel
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– Evening Session
FinanceModeling
References
Financial
Corporate
 Link up interest expense and interest income to Income Statement
Sampel
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- Prepared for CLSA
for India
Circulation
(Pune) 49
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– Evening Session
FinanceModeling
Financial
References
Corporate
 Link up debt repayments and borrowings to Cash Flow Statement
Sampel
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- Prepared for CLSA
for India
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(Pune) 50
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– Evening Session
 Link the debt balances to Balance Sheet

 Review final logic for totals and other statistics
FinanceModeling
Financial
Calculations
References
Corporate
Sampel
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Debt & Interest Schedule

– Evening Session
Other Long
Term Items
Depreciation
FinanceModeling
Sales
COGS
Income
Statement
Shareholder’s
Capital Equity
Financial
Working Capital
Amortization
Cash Flow
Statement
Corporate
PP & E,
Depreciation
Amortization
Balance Other Long

Sheet Term Items
Intangibles,
Amortization Intangibles
Sampel
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Trouble Shooting Your Model
Circular References
– Evening Session

 Understanding what it means?
 Designing a solution for fixing circular references
 Balancing the financial model

FinanceModeling
 Error handling and tracing the logic of the model
 Final Touches
 Validate assumptions
 Ensure formulae are in place

Financial
 Make sure formatting is as desired

Corporate
Sampel
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Dealing with Circular Models
Financial
FinanceModeling
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What is Circular Reference
– Evening Session
Interest Expense
&
Interest Income
FinanceModeling
Financial
Revolver Balance
Net Income
& Cash Balance
Corporate
Free Cash Flow
Sampel
PrivatePPTs
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for India
Circulation
(Pune) 55

Financial Modeling by Corporate Briddge

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dheerajvaidya@corporatebridge.

Private and Confidential

Financial Modeling Training Program

Prepared by: Dheeraj Vaidya

 Overview of Financial Modeling

 Working Capital Schedule

 Building Income Statement

 Preparing for Debt & Interest

Sampel PPTs - Prepared for CLSA India (Pune) 2

Simplified representation of performance

 Blend of skills is required

 Corporate Finance principles

 Different Types of Models

 Debt/ Recapitalization/ Financing Model

 Utility of Financial modeling

Need to have clear and well defined assumptions

 Assumptions should reflect business realities and expectations

 Use the past performance and a guide for future expectations

 How to make Assumptions

 Past as an indicator of future performance, except in case of

 Key tests a financial model should withstand

 Features of an effective model

Private and Confidential – Not for Circulation 4

• BLACK for calculations and references on same schedule/ asset

• GREEN reference from another schedule/ sheet

• RED warnings to another user/ links to another model

 More Important – Others should be able to understand!

Use a Modular Approach

• Export the supporting schedules to the core statements on completion

Income Debt &

Plant & Machinery, Cash Flow Shareholder’s

Intangibles, Balance Other LT

Historical data as a guide for projections

 Reasonable and Defensible set of Assumptions and Projections

 Models need to be efficient and clear

 A good model should be easy to follow and focus on key drivers

 Use Beta testing

 Challenge each assumption with the following

 What is a impact if the assumption is decreased?

Create the line items

 Project Revenue and Operating expenses (Sales to EBITDA)

 Historical data only

 Setting up the Income Statement

 Setting up the Balance Sheet

 Setting up the Cash Flow Statement

statements are often difficult to reconcile

Inputs are in Blue

 Input past information in the Income

 Normalize for any non-recurring items

 Forecast net sales for future years

 Drivers: forecasted annual sales growth

Only one blue input

Inputs from research/ past trends

 Forecast future operating expenses

 Drivers: margin assumptions for future operations

 Challenge assumptions for being reasonable

Inputs are in Blue

Its practical to show

 Input past information for the Balance Sheet

 Check if past Balance Sheets are balancing

Working Capital Overview

Referenced from Income Statement

 Setting up the Working Capital Schedule

 Reference the past data from the balance sheet