For full text article go to : https://www.educorporatebridge.com/financial-modeling/financial-modeling-tutorial/ This financial modeling tutorial will help you to create a simple and sophisticated financial model by understanding different important concepts like what is financial modeling, some important formatting tips , base equation, different assumptions one can use to prepare the forecasted income statement , balance sheet and cash flow statement etc.
2. What is Financial
Modeling ?
A financial model represents the
financial performance of a company.
It represents the financial
performance for
• Past
• Future
3. Historical input
Historical input data should always
be taken from the right source.
As while making assumption for the
forecasted year historical data is one
of the criteria needs to be
considered.
4. Assumption
Referred to as “drivers”.
Some criteria needs to be considered while
making an assumption are
• No bias should get into the assumptions on
the business
• Clearly understand the expected changes
in future performance
• Understand Management expectations
•
Check out what other analysts think about
the company
5. Color Coding
One of the important formatting factor in a financial
model.
This is done so that a person who has never seen your
model comes to know easily whether a certain financial
data is a historical input data, calculations or linkages.
6. Formatting Tip
If your year 2009 comes in cell B2 of
the income statement then it is
advisable that 2009 in other sheets like
balance sheet, cash flow statement
should also come in cell B2. This
formatting helps during linkages.
7. Preparation of financial modeling
To prepare a financial model one needs to understand the
company on which the person is preparing the model. The
person should also have a thorough knowledge about the
industry, its competitors in which his company belong to
8. Sources
In order to analyze a company the different sources that
needs to be referred are
• Annual report of the company
• Transcript
• Conference call
• Presentations published by the company
9. 5 years of historical data should be used while
preparing a financial model
You are an “Analyst” not an “Auditor”. Historical
data in the annual report published by the company
does not compile then don’t sit to tally the financials.
For 2011 historical data pick the data from 20112012 and not 2010 -2011.Use the updated annual
report
Key financial terms like gross profit, EBITDA, EBIT,
net profit etc should be available in the income
statement
Compilation of
Historical
10. BASE Equation
For Fixed Asset
Equation
Items
Description
B (Beginning)
Beginning fixed asset
This is the fixed asset which is carried forward from
last year
A (Addition)
Capital expenditure
This is the extra asset you bought this financial year
S (Subtraction)
Depreciation/ sale of
asset
Depreciation being an expense you need to deduct it
Since the assets are sold in this financial year that
amount needs to be deducted.
E (Ending)
Ending fixed asset
This fixed asset amount is generated after the
addition and subtraction of all the necessary items in
this financial year and will be carried forward in the
next year
11. BASE Equation
For Shareholders Equity
For Long term Debt
Equation
Items
Equation
Items
B (Beginning)
Beginning shareholders fund
B (Beginning)
Beginning long term Debt
A (Addition)
Net income / Issuance of equity
A (Addition)
Issuance of debt
S (Subtraction)
Repurchase of equity / Dividend paid
S (Subtraction)
Repayment of Debt
E (Ending)
Ending equity balance
E (Ending)
Ending debt balance
12. Income Statement
A financial statement which
measures the company’s financial
performance over a specific
accounting period.
It gives a summary of how the
business incurs its revenues and
expenses through both operating and
non-operating activities.
13. Income Statement Projection
Company ABC
Income Sheet (Rs m)
Net Sales
(-)Direct cost
Gross profit
(-)Selling and admin cost
EBITDA
(-)Depreciation
EBIT
(-)Interest expense
EBT
(-) Income tax
Net profit
Net Sales
Year on year growth
CAGR
Sales growth
percentage provided
by the management
FY10A
FY11A
FY12A
Historical
2904
(1600)
1304
(350)
954
(101)
853
(44)
809
(175)
634
3408
(2000)
1408
(441)
967
(127)
840
(60)
780
(215)
565
FY13E
FY14E
FY15E
FY16E
Forecast
3959
(2500)
1459
(508)
951
(135)
816
(63)
753
(255)
498
Direct Cost & selling &
admin cost
Percentage on sales
Depreciation
Percentage on fixed
asset
14. Income Statement Projection
Company ABC
Income Sheet (Rs m)
Net Sales
(-)Direct cost
Gross profit
(-)Selling and admin cost
EBITDA
(-)Depreciation
EBIT
(-)Interest expense
EBT
(-) Income tax
Net profit
Interest expense
Can be calculated by
multiplying the
interest expense rate
and the average
closing debt balance
FY10A
FY11A
FY12A
Historical
2904
(1600)
1304
(350)
954
(101)
853
(44)
809
(175)
634
3408
(2000)
1408
(441)
967
(127)
840
(60)
780
(215)
565
FY13E
FY14E
FY15E
FY16E
Forecast
3959
(2500)
1459
(508)
951
(135)
816
(63)
753
(255)
498
Income tax
Calculate the tax rate
using the historical
and use the same rate
in future
Profit
Calculated by
deducting expenses
from the revenue
15. Balance Sheet Projection
Company ABC
FY10A
FY11A
FY12A
Historical
Goodwill
Goodwill is not amortized so
it needs to be kept constant
in the future years.
27
462
87
576
30
473
82
585
40
473
85
598
Fixed Assets
PP&E, net
851
950
1100
1671
1671
1671
3,098
3,206
3,369
Current Liabilities & Provisions
Accounts Payable
Other Current Liabilities
Total Current Liabilities
206
248
454
221
223
444
279
257
536
Long Term Debt
1600
1360
875
Shareholder's Funds
1044
1402
1958
3,098
3,206
3,369
Total Assets
Total Liabilities & Equity
FY14E
FY15E
Forecast
Balance Sheet (Rs m)
Current Assets, Loans and Advances
Cash
Accounts Receivable, net
Inventory
Total Current Assets
Other Intangible Assets
Goodwill
Fixed asset, long term debt,
shareholders fund
Calculate using the Base
equation and then needs to
be linked in the balance sheet
FY13E
FY16E
16. Balance Sheet Projection
Company ABC
FY10A
FY11A
FY12A
Historical
27
462
87
576
30
473
82
585
40
473
85
598
851
950
1100
Other Intangible Assets
Goodwill
Current assets and current
liabilities
These items needs to be
calculated in the working
capital schedule
1671
1671
1671
3,098
3,206
3,369
Current Liabilities & Provisions
Accounts Payable
Other Current Liabilities
Total Current Liabilities
206
248
454
221
223
444
279
257
536
Long Term Debt
1600
1360
875
Shareholder's Funds
1044
1402
1958
3,098
3,206
3,369
Total Assets
Total Liabilities & Equity
FY14E
FY15E
Forecast
Balance Sheet (Rs m)
Current Assets, Loans and Advances
Cash
Accounts Receivable, net
Inventory
Total Current Assets
Fixed Assets
PP&E, net
Cash
Cash item needs to be linked
by the ending cash balance
from the cash flow statement
FY13E
FY16E
17. Working Capital Projection
Current Asset
Current Liability
Accounts receivable
Accounts receivable in days = 365*Average
debtor divided by net sales.
Using the past historical data assume the
number of days for the forecasted years.
Accounts Payable
Accounts receivable in days = 365*Average
Payable divided by net purchases.
Using the past historical data assume the
number of days for the forecasted years.
Inventory
Inventory in days = 365*Average inventory
divided by net COGS.
Using the past historical data assume the
number of days for the forecasted years.
Other current liability
One can calculate the other current liability
for the historical as a percentage on the
COGS and then you can take an average
and assume for the future.
After completing this working capital schedule link it to the balance sheet
18. Cash Flow Statement
Assess the amount, timing, and predictability of cash-inflows and cashoutflows, and are used as the basis for budgeting and business-planning.
It answers the questions:
• Where the money came (will come) from?
• Where it went (will go)?
The accounting data is presented usually in three main sections:
• Operating-activities (sales of goods or services),
• Investing-activities (sale or purchase of an asset
• Financing-activities (borrowings , or sale of common stock etc)
19. Cash Flow Projection
Company ABC
Cash Flow Statement
Whatever changes you
have incurred in the
amount of the item in
the income statement ,
balance sheet in the
financial year those
changes will be
recorded in the cash
flow statement
according to that items
cash inflows and
outflows.
Operating Activities
Net Income
Depreciation
Change in Working Capital
Cash Flow from Operating Activities
Investment Activities
Capital Expenditures
Additions to Intangibles
Cash Flow from Investing Activities
Financing Activities
Proceeds from/ (repayment of) Revolver
Issuance / (Repayment) of Long Term Debt
Issuance/ (Repurchase of) Equity
Dividends
Cash Flow from Financing Activities
Net Change in Cash
Beginning Cash Balance
Ending Cash Balance
FY10A
FY11A
Historical
FY12A
FY13E
FY14E
FY15E
Forecast
FY16E
20. For More Information
Knowledge is like a line with no ends
so
To know more on this topic click on the link below
https://www.educorporatebridge.com/financialmodeling/financial-modeling-tutorial/
21. Be a part of edu CBA Family
Visit our website :
https://www.educorporatebridge.com/
Free Resources :
https://www.educorporatebridge.com/free-courses/
Edu
CBA
Like us on :
https://www.facebook.com/CorporateBridgeGroup
Follow us on :
https://twitter.com/corporatebridge
22. If you have found this presentation to be
useful, kindly
Like
Share
Follow
Follow us!
Thank
You!!!