Statement Modeling

1-A financial model is a tool built in a spreadsheet that’s used to forecast a business’s
financial performance into the future and make business decisions.
2-Corporate Decisions : Valuation, equity research, portfolio management
3-Investment Decisions : Company performance, strategic planning
4-Project Finance: Mergers & acquisitions; raising capital
5-Corporate Transactions : Mergers & acquisitions; raising capital
6- There are 8 types of Financial Models
7- Hierarchy of Financial Modeling is 7 slices
8- LBO Analysis Determine how much liquidity can be used to purchase a company
9- Capital Raising Analyze the pro forma impact of raising debt
10- M&A Analysis Evaluate the attractiveness of potential merger,acquisition, or
divestiture
11- Sensitivity Analysis Evaluate how sensitive an investment is to changes in drivers
12- Scenario Analysis Estimate changes in the value of a business in different possible
scenarios
13- DCF Analysis net-discounted cash flow analysis to value a business, project, or
investment
14- 3-Statement Modeling Income statement, balance sheet, cash flow statement
15- Key Structure for Model Building is 3
16- Inputs (Assumptions) : Clearly identified and not Should only ever be entered once
17- Processing (Calculations) • Processing should be transparent • Broken down into
simple steps • Not easy to follow
18- Outputs (Graphs & Charts) • Quickly accessible • Easily updated and exported
19- Modeling Best Practices are 7
20- Depending on analyst preferences, models may be built in several different ways.
21- Many companies do report using this convention.
22- Advantages include making the model easier to follow and being able to use the SUM
function.
23- It may cause some confusion doing conversions while building the supporting
schedules.
24- Commingled Shows expenses as positive numbers until operating income .
25- We need to be careful when entering and interpreting data based on how we build the
model.
26- Complex Models High detail • Precise • Hard to model • Prone to error
27- Simple Models • Basic • Easy to follow • Lack of precision • Overly simplified
28- while it is tempting to make your model complex, it Is important not to overcomplicate
the model with too much detail.
29- Best Models Keep things as complex as possible while providing enough detail for
decision-making
30- Setting Objectives • Accurate • Reasonable data ranges • Enter each data once
• Easy to understand • Easy to update data
31- Achieving Objectives • Enter each data once • Use color to differentiate inputs
and outputs • Use data validation& conditional formatting • Use comments
32- Model Processing its Setting objectives : • Easy to maintain • Accurate processing
33- Achieving Objectives of Model Processing : • Break down simple calculations • Use
comments and annotations • Use formatting • Calculate final figures, which will go onto
the output reports
34- Setting Objectives of Model output • Provide key results to aid decision-making
• Easy to understand • ambiguous
35- Achieving Objectives of Model output • Make outputs modular • Consider creating a
summary section with only the most important key model outputs
36- There are generally two ways to set up your financial model – multi-spreadsheet and
single-spreadsheet.
37- Single-Spreadsheet Approach Easy to link and formula build Simplifies organization of
larger models
38- Single-Spreadsheet Approach Cleanest Most organized Easiest to use
39- Financial Forecasting Framework are 6
40- Income Statement Breaks down longer calculations such as PP&E and debt schedule
41- Broadly speaking, there are four types of forecasting methods.
42- Top-Down Analysis : TAM , Work down from there based on market share and
segments until arriving at revenue
43- Bottom-Up Analysis • Start with most basic drivers of the business (units) • Build up
the analysis all the way to profit
44- Regression Analysis Analyze the relationship between revenue and other factors
using the regression analysis
45- Year-Over-Year Analysis • Most basic form of forecasting • Calculate the year-
over-year change in revenue
46- There is a major difference in setting cost of goods sold as the target or gross profit as
the target
47- Complex Models • Based on margin • Easy to model while Simple Models • Based on
inputs • Per unit
48- Consider factors such as economies of scale and learning effects for labor,materials,
and inflation percentage.
49- direct costs often include things like marketing, sales, and general and administrative
expenses.
50- You may have a separate schedule that builds the indirect cost with a lot of detail, a
hybrid of fixed and variable; some components are a percentage of revenue, and some
components are fixed dollar costs.
51- Detailed Approach • Historical trends • % of sales based on trends
52- Quick & Simple Approach • Account/client detail • Inventory management detail
53- Moderate Approach • Receivable days • Inventory days • Payable days
54- The shorter that a company can take to pay its expenses, the better because the
company gets to keep that cash.
55- Companies want to carry as small of an inventory balance as possible to support the
sales that they're going to generate, so they want inventory to turnover quickly.
56- • Forecast property, plant, and equipment requirements directly (e.g., store
expansion)• Forecast depreciation/amortization based on stated depreciation
/amortization policies. • If deprecation policies are not available: low complexity
57- Quick and Simple Approach • Forecast depreciation & amortization as a percentage of
opening PP&E balance or percentage of revenue. • Forecast PP&E balance based on a
capital asset turnover ratio.
58- Average asset life = Gross assets / Depreciation expense
59-There are 4 types of capital structure
60- Purchases/Payments of Investing Activities is an increase
61- Issuance of stock/Debt Increase is an increase

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