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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 Shareholders Equity Schedule Shares Outstanding Schedule Preparing for Debt & Interest Trouble Shooting
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Understanding the purpose of the modeling in order to create the right design and functionality
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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
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Separate line items are always useful
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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
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Working Capital
Income Statement
Shareholders Equity
Intangibles, Amortization
Balance Sheet
Other LT Items
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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
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Income Statement
Historical information Project Revenue and Operating expenses (Sales to EBITDA)
Balance Sheet
Historical data only
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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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Forecasted figures
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
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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
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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
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Income Statement
Balance Sheet
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Referenced from BS
Calculations
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Calculations
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Assumptions
References, if constant
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Drivers
Projections
Drivers
Use the future ratios and assumptions to project the forecasted working capital balances
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Calculations
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Arrive at Cash Flows based on individual line items Ensure signs are accurate!
Private and Confidential Not for Circulation
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Link up the forecasted Working Capital cash flows with the Cash Flow Statement
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Sales COGS
Income Statement
Working Capital
Balance Sheet
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