Financial Modelling Flashcards
(8 cards)
Why are models Circular?
Models can be circular usually due to the interest in financial modelling. In order to make the model work when the company needs money we assume it draws down from a revolving credit facility. Drawing down from the revolver results in more interest expense (debt) which requires more money to pay so more debt so more interest. Similarly, excess cash results in more interest income etc.
What are good practices for building financial models?
Keeping all financial statements on one tab, hardcodes (info we input manually) out of our model tab, separate tab for assumptions, consistent formating, saving new versions, no gridlines
How is the revolver calculated?
To calculate change in revolver, take the negative of the minimum of the beginning revolver balance and everything else that happens to cash during that period including beginning cash balance. The sign must be reversed since needing cash increases the revolver (a drawdown) and having excess cash decreases the revolver (a paydown).
The formula is :
Revolver (Paydown)/Drawdown =
− MIN (Cash before Revolver, Beginning Revolver Balance)
How do you forecast revenue for a retailer?
You can do normal calculation and grow last period´s revenue by a historic growth rate. To make it more specific you can multiply number of stores by sales per store. If you want to be very detailed you could aggregate revenue forecasts for each store or each product sold by the firm.
Forecast revenue for a telecommunications company
Multiply revenue of last period by an appropriate growth rate. You can also multiply average revenue per user by number of users, forecast number of users using a growth rate.
Why is spreading historical financials important?
First it is done to calculate certain ratios and statistics based on historical financial statements that can be used to help select model drivers and assumptions. Second, historical balance sheet is the beginning balance sheet for your forecast model. Third, it is important to compare historical financial statements with projected financial statements to determine how good are your forecasts.
Walk me through building a model
First we want to do due diligence on the company, the industry and factors that drive the firm´s business. Second we spread the historical financial statements and calculate key statistics such as growth rates and margins from the statements. Next we want to select our model drivers and assumptions. Then we model the three financial statements starting with the income statement, then the balance sheet and then the cash flow statement. Here we want to include other supporting schedules such as the debt schedule. Assuming the model balances (have a check item in the balance sheet) then we stress test it and check to make sure assumptions are reasonable. Finally you create supporting schedules or exhibits and perform analysis that you need such as DCF.
What is the best way to check a model?
Once the model has been stress-tested and the balance sheets balances, we want to print out the model and analyze the results. Compare the projected results with its historical results and look for any abnormal increases or decreases from year to year. Calculate key ratios with the calculator and compare them to the model then check everything.
