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1
Financial Modeling in Excel for Business Analysts and Consultants
Step by step practical guide
2
Introduction
3
In this presentation I will show you how to create and analyze
financial model in Excel
4
We will use real life example of company producing hand-made products from clay
5
I will show you the steps that will enable you to get from estimation of separate cost and balance sheet position into 3 financial statements
Sales M&E
External services
Taxes & Payments
Payroll
Taxes
Other
CAPEX
Depreciation – 6 groups
Working Capital
Debt
Equity changes
Profit & Loss
Balance Sheet
Cash Flow
6
What we will talk about in this presentation is organized in the following sections
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
7
What I will show in this presentation is a part of extensive on-line course where I show you in details how to do it in Excel and you can download the models in Excel
Financial Modeling for Business Analysts and Consultants
$45 $15
Click to check my course
8
Before we start remember there are 2 types of models that you will be building. In this presentation we will talk only about financial models
Financial Model Business model
Mainly done for budgeting and valuation Mainly done managing business, searching for opportunities
Financial models look very similar
Business models are specific to the company, the industry and the business model
Used heavily for external purposes: talk with the Supervisor Board, banks, future investors, auditors
Used heavily for internal purposes: planning, looking for opportunities, analyzing performance
Generates financial statements: P&L, BS, CF
Is driven by many KPIs and quantitative elements. Shows in-depth relation between KPIs
Has some KPIs and quantitative elements
9
If you want to learn more about on-line business models go to the following presentation
Business models Practical guide for startups and entrepreneurs
presentation
10
Let’s start with the first section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
11
Profit and Loss modelling
12
We will start with modelling the cost position of profit and loss statement. Once we are done with it we will link it to profit an loss
Sales M&E
External services
Taxes & Payments
Payroll
Taxes
Other
CAPEX
Depreciation – 6 groups
Working Capital
Debt
Equity changes
Profit & Loss
Balance Sheet
Cash Flow
13
We will use real life example of company producing hand-made products from clay
Ceramic dishes Ceramic chimneys
Ceramic tubes Ceramic pots
14
Sales Estimation
15
For every category of sales you should have estimation of quantity sold as well as the average price. You also should have some assumption on growth (both of price as well as quantity sold)
Ceramic dishes sales
# of dishes sold at the beginning
Average price at the beginning
% growth in volume in next years
% growth of average price in next years
16
On the basis of this assumption you should create a separate sheet with sales forecast
17
Materials and Energy Estimation
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We estimate separately materials and energy in the sheet M&E. First we divide into Fixed and Variable. Variables we estimate as a percentage of sales
Materials & Energy
Materials
Energy
Fixed
Variable Sales
% of sales
Fixed
Variable Sales
% of sales
19
On the basis of this assumption you should create a separate sheet with Material and Energy estimation
20
The data on sales value and volume should be fed from Sales sheet to M&E sheet (Material and Energy estimation)
Sales M&E Sales Value
Sales Volume
21
Payroll and social security Costs
22
Now we move to the Payroll. We divide it into Head Office and Production
Payroll Costs
Head Office
Direct Production
# of employees
Average salary
% growth of salary
# of employees
Average salary
% growth of salary
23
Social security are usually estimated in relation to payroll costs. In our case we assume 27% of estimated previously costs
Social security costs Payroll Costs = 27% x
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On the basis of this assumption you should create a separate sheet For Payroll and social securities sheet
25
External services
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We now estimate External services. We divided them into fixed and variable part. Variable is estimated as a percentage of Sales
External Services
Fixed
Variable
Bought in Country
Imported
Sales
% Sales
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On the basis of this assumption you should create a separate sheet with External services estimation
28
The data on sales value should be fed from Sales sheet to External services sheet
Sales External services
Sales Value
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Capex and depreciation
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When it comes to assets the problem is that they have 3 different components that you have to track. On top of that every asset has to be tracked separately
Depreciation Gross book value Net book value
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We get the net book value by deducting from gross book value the sum of all depreciation ever done
Sum of all Depreciation Gross book value Net book value = _
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We first divide the fixed assets into 6 groups
Fixed Assets
Land
Transportation
Intangibles
Buildings
Equipment and Machinery
Others
33
Every group has its own sheet where we estimate the gross value, depreciation on net value. Below example for Intangibles. As you can see this has to be done by years in which the asset was bought
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After we are done with each and other type of asset we can summarize the date in the sheet FA Summary
35
Below you can see how the data flows from the sheets where we have estimation for each and every group of assets to FA Summary and later on to Balance sheet (BS) and Profit & Loss account (P&L)
CAPEX
FA Intangibles
FA Machinery
FA Transp eqmt
FA Other
FA Summary
P&L
BS
FA Buildings
Depreciation
Net book value
36
More details you can find in my on-line course where you can you will see how to do it in Excel and you can download the models in Excel
Financial Modeling for Business Analysts and Consultants
$45 $15
Click to check my course
37
Taxes & Payments
38
Companies pay taxes and payments (especially local ones) that go into costs. We assumed them to be fixed
39
Other costs and revenues
40
We estimate other costs and revenues as a percentage of sales
Other costs by type
Sales
% of Sales
Other operating costs
Sales
% of Sales
Other operating revenues
Sales
% of Sales
41
On the basis of this assumption you should create a separate sheet for Other costs and revenues
42
Profit & Loss statement
43
We get the Profit and Loss sheet projection in a separate sheet by feeding in the data from other sheets
44
Let’s go to next section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
45
Working Capital
46
Working capital consists of 4 major groups of components
Inventory
Working Capital
Materials
WIP
Goods
Finished Products
Receivables
Payments in advance for deliveries
Trade receivables
Other receivables
Receivables resulting from taxes, subsidies
Short term accruals
Liabilities
Trade liabilities
Prepayments for deliveries
Liabilities resulting from taxes, charges
Liabilities resulting from salaries
Accruals
Cash and equivalents
47
We will draw data from other profit and loss sheets and on the basis of the data we will calculate the working capital positions that in turn will be fed into Balance and sheet as assets or liabilities
P&L
Sales
External Services
Other
Working Capital
BS - Assets
BS - Liabilities
M&E
Assets
Liabilities
48
When it comes to assets the problem is that they have 3 different components that you have to track. On top of that every asset has to be tracked separately
Turnover rotation in days
Basis i.e. sales / operating costs /
materials
Position of Working capital i.e. inventory
/ receivables = x 365 ÷
49
On the basis of this assumption you should create a separate sheet for working capital
50
More details you can find in my on-line course where you can you will see how to do it in Excel and you can download the models in Excel
Financial Modeling for Business Analysts and Consultants
$45 $15
Click to check my course
51
Let’s go to next section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
52
Debt
53
When it comes to debt we have 2 loans. For the balance sheet statement we have to divide it into short term and long term part
Debt
Old loan
New Loan
Short-term part
Long-term part
Short-term part
% Sales
54
In a separate sheet we estimate the opening balance and the ending balance of each and one of the loans (on the basis of assumed payment schedule). This allows also to estimate interest paid on the loans
55
Let’s go to next section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
56
Equity
57
In a separate sheet we model all the relations with the owners like dividend policies , contribution to be paid, etc.
58
Let’s go to next section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
59
Balance sheet
60
Once we have the Assets modeled in FA summary as well as the most of the position of the Current Assets in Working Capital we get everything together
Balance sheet
Total Assets
Total Liabilities
Fixed assets
Current Assets
Equity
Liabilities
61
For the categories we get the date from the separate sheets
Balance sheet
Total Assets
Total Liabilities
Fixed assets
Current Assets
Equity
Liabilities
FA Summary
Working Cap
SC
Working Cap
Debt
62
The only thing we are missing is the cash. We did it on purpose and there is a nice way to estimate the cash position and still the model be consistent
63
You have to get Assets equal to Liabilities in Balance Sheet. You achieve it by not modelling the cash but by calculating it as a difference between Liabilities and all other assets (except for Cash)
FA Summary BS – Assets (w/o Cash)
Working Cap
Debt
P&L (Profit)
Working Cap
BS – Liabilities
SC (Equity)
Cash
=
64
You have to get Assets equal to Liabilities in Balance Sheet. You achieve it by not modelling the cash but by calculating it as a difference between Liabilities and all other assets (except for Cash)
Cash = BS – Liabilities BS – Assets (w/o Cash) -
65
We get the Balance sheet projection in a separate sheet
66
Let’s go to next section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
67
Cash Flow
68
In Cash flow you try to divide the CF into 4 parts
Investment CF
CF
Operating activities CF
Financial CF
CF to / from shareholders
CF
69
We will try to get from Net profit to the Cash position
Net profit
Change in Cash and cash equivalents
CF
Change in Cash and cash equivalents BS =
70
We will estimate CF on 4 different levels
FA Summary
CF – Operating Activities
P&L
Deprecation Difference between Interest earned and paid
BS
Change in inventories, receivables Change in provisions, short-term
liabilities, prepayments and accruals Other adjustments
CF – before financial activities
Disposal of intangible and tangible fixed assets
CAPEX
Capital expenditure
CF – Free cash flows to equity
Change in bank and other loans
P&L
Interest paid and earned
CF – Free cash flows to firm SC
Shareholder-related payments and contributions
Gross dividend paid
Investment CF
Financial CF
CF related to shareholders
71
We get the Cash flow projection in a separate sheet
72
Let’s go to final section
Profit and Loss modelling
Capex and Depreciation Working Capital
Debt
Analyses Cash flow modeling
Balance sheet modeling Equity
73
Analyses
74
So we managed to get integrated model that we can play with and see what can we do further with our company
P&L
Sales
External Services
Other
CF BS
FA Summary M&E
Debt
Work Cap
SC
Payroll
FA Summary
Taxes & Payments
CAPEX
75
Now you can finally analyze a lot of things using this model
Estimate the value of the business
Check what change in sales can do to the
cash position
Check what change in cost can do to
profitability of the business
Play with financing structure
Estimate the boundaries of the
business
Use it as a tool during due diligence
Use the model to get financing for acquiring the
business
Play with the dividend policy
76
More details you can find in my on-line course where you can you will see how to do it in Excel and you can download the models in Excel
Financial Modeling for Business Analysts and Consultants
$45 $15
Click to check my course
77
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