WEBINAR #3 JUNE 27 , 2013

How to Create a Comprehensive Financial Model

What is a Financial Model?

A quantitative representation of financial information, from e.g. a business, organization or branch of government

It is used by the financial analyst and may be

constructed for many purposes including: valuation of a security forecasting future raw material need determining benefits of a takeover or merger.

What is a Financial Model?

A financial model is designed to represent in mathematical terms the relationships among the variables of a financial problem so that it can be used to answer "what if" questions or make projections.

What is a Financial Model?

A model is a simplified representation of a situation or problem and modeling is the process of building, refining and analyzing that representation for greater insight and improved decision making.

(Source: Mastering Financial Modeling – Financial Times series)

Why Create a Model?

A tool to assist you to forecast when you will start to generate revenue and how much you will need to spend to get there.

Allows you to predict and continuously modify the assumptions (with a great deal of flexibility) underpinning the financial performance of your business.

Why Create a Model?

To present your business to potential investors or other partners - reasonably identify how much the company will need to spend in the early phases to achieve a level of income in excess of expenditure.

The financial model can also be used to try out new ideas and even test other business models.

Tools necessary for forecasting

Decide on software – Excel, VBA, Customized or “off the shelf” programmes

Cash Flow Projections Sales / Income Expenditure

Variable Costs Operating Expenses Net Income

Integrate with Business Plan / Business Model

Steps in Creating the Model

First Step:Define and Structure the proposal

Define why the model is needed and determine questions that need to be answered

Determine how accurate or realistic outputs will need to be

Quantify relationships among variables

Steps in Creating the Model

Second Step:Define the input and output variables

List all inputs and identify who will provide them

You may use reasonable assumptions based on precedent or established practices but avoid arbitrary guesswork

Compile list of tabular, graphical or other outputs the model will need to generate

Steps in Creating the Model

Third Step:Determine who will use the model and frequency of usage

Consideration for level of detail

User interface requirements

Cash Flow Projections

Enter monthly revenueEnter monthly expenditure

Variable costs Operating costs Debt servicing

Calculate net income

Completing the process

Risks Identify possible risks & show how mitigated

Cash flow projections – (3 years)Income statementBalance sheet

Opening statement or personal financial statement

Projected balance sheetFunding Requirements

State amount & type – debt or equity

Applications

Basis for sound business activitiesFinancial negotiationsGrant fundingInvestment promotionFeasibility studiesDue diligence analysisManagement reports

Benefits for Business

(Used in conjunction with Business Plan) Identify possible weaknesses in project concept and develop

improvements to mitigate effects of such weaknesses

Optimize level of profitability / returns on project

Identify and evaluate possible associated risks and their quantitative impact

Develop strategy to mitigate above risks

Time saving in preparation of project documentation to ensure compliance with evaluation criteria and process

Benefits for Business Owners

Understand how personal and business strategies can work together

Explore liquidation opportunities and financial alternatives before implementing change

Explore options and alternatives that can add significant future value

Consolidate financial information for decision making

Evaluate personal investments, estate planning and even retirement strategies

Examine possible exit strategies

Benefits for Professionals

Maximize retirement benefit options Explore possible financial alternatives before implementing

change Gain better understanding of your financial circumstances and

direction Explore options and alternatives that may add future value Consolidate financial information to better enable timely and

well informed decisions Integrate executive compensation strategies with personal

investment, insurance, estate planning and retirement planning

The End

Thank you!