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Financial Modeling in Excel for Business Analysts and Consultants

Step by step practical guide

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Introduction

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In this presentation I will show you how to create and analyze

financial model in Excel

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We will use real life example of company producing hand-made products from clay

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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

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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

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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

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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

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Profit and Loss modelling

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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

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We will use real life example of company producing hand-made products from clay

Ceramic dishes Ceramic chimneys

Ceramic tubes Ceramic pots

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Sales Estimation

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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

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On the basis of this assumption you should create a separate sheet with sales forecast

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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

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On the basis of this assumption you should create a separate sheet with Material and Energy estimation

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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

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Payroll and social security Costs

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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

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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

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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

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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

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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

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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

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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

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Companies pay taxes and payments (especially local ones) that go into costs. We assumed them to be fixed

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Other costs and revenues

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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

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On the basis of this assumption you should create a separate sheet for Other costs and revenues

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Profit & Loss statement

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We get the Profit and Loss sheet projection in a separate sheet by feeding in the data from other sheets

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Let’s go to next section

Profit and Loss modelling

Capex and Depreciation Working Capital

Debt

Analyses Cash flow modeling

Balance sheet modeling Equity

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Working Capital

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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

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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

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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

Turnover rotation in days

Basis i.e. sales / operating costs /

materials

Position of Working capital i.e. inventory

/ receivables = x 365 ÷

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On the basis of this assumption you should create a separate sheet for working capital

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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

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Debt

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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

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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

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Let’s go to next section

Profit and Loss modelling

Capex and Depreciation Working Capital

Debt

Analyses Cash flow modeling

Balance sheet modeling Equity

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Equity

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In a separate sheet we model all the relations with the owners like dividend policies , contribution to be paid, etc.

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Let’s go to next section

Profit and Loss modelling

Capex and Depreciation Working Capital

Debt

Analyses Cash flow modeling

Balance sheet modeling Equity

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Balance sheet

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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

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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

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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

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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

=

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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) -

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We get the Balance sheet projection in a separate sheet

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Let’s go to next section

Profit and Loss modelling

Capex and Depreciation Working Capital

Debt

Analyses Cash flow modeling

Balance sheet modeling Equity

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Cash Flow

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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

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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 =

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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

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We get the Cash flow projection in a separate sheet

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Let’s go to final section

Profit and Loss modelling

Capex and Depreciation Working Capital

Debt

Analyses Cash flow modeling

Balance sheet modeling Equity

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Analyses

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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

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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

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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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