Excel Modeling For Finance

MODULE 1: INTRODUCTION

ACADEMIC YEAR 2018 - 2019

Claude Cohen
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Course Content
Modules Date Delivery
1. Introduction to Financial Modeling with Excel Oct.4 On-line
• Spreadsheets & Financial Models
• Preparing for Modeling
• Best (and worst) Practices

2. Self-paced Assignments On-line

• Excel advanced features
• Time-value-of-money and Financial functions.
• Logical functions.
• Lookup and Reference functions
• Date & Time functions

3. Building Financial Models On-line

• Financial Planning & Forecasting
• Capital Budgeting
• Corporate Valuation

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Introduction Session Content

1. Introduction to spreadsheets & financial models.
2. Preparing for modeling.
3. Building robust models, dos and don’ts.

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 Introduction to

1 Spreadsheets and
Financial Models
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Introduction to Financial Models: Definitions

Spreadsheet : ”A program for organizing numerical data in tabular

formats allowing rapid calculations with changing variables.”
Spreadsheet Model : ”A theoretical construct in a spreadsheet
that represents numerical processes by a set of variables and a
set of logical and quantitative relationships between them.”

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Financial Models in Practice

Help managers make decisions in investment & planning.

Financial modeling covers a wide spectrum from simple
budgeting spreadsheets to sophisticated risk modeling of
projects.
Examples:
‐ Forecasting revenue;
‐ Budgeting expenses;
‐ Business planning including financial statements;
‐ Project assessment (M&A, new product or venture…);
‐ Option pricing;
‐ Risk modeling.

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A Large Range Of Modeling Situations

Start up situations
‐ How much capital will be needed?
‐ How many widgets do we need to sell, by when?
‐ What pricing model & sales channels should we use?
‐ What is the break-even point? What is the sensitivity around it?
‐ What is the forecasted cash impact of the working capital?
Troubled businesses, restructuring situations
‐ How long will my current cash last under various scenarios?
‐ What sales assumptions need to occur to allow the company to recover?
Growth situations
‐ What resources will it take to get to the next level financially?
‐ What would be the impact of the most likely risks to the current growth plan?
‐ Which capital projects should we invest in to maximize growth and minimize risk?
‐ What is our best strategy?

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Who Builds Financial Models?

• CFOs in small organizations.

• Controllers to measure business performance.
• Treasurers to simulate short-term cash placements.
• M&A analysts, investment bankers & consultants.
• Equity research teams, Venture capital staff.
• Product managers to simulate growth & break even.
• Sales managers to forecast revenue.
… and anyone having to calculate business outputs involving a set of
complex variables.

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Financial Model Basic Structure

1. Contains Input Parameters.

2. Produces Mathematical Formulas and Calculations.
3. Identifies Outputs.
4. Involves Units, Currency (e.g., $, £, ¥, €) and Dates.

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Skills Needed To Build Financial Models

Excel
• Features, Functions, Formulas, Graphs, Macros / VBA,
Toolbars / Ribbons, Performance Limits, Protection
Methods, etc.

Finance, Accounting & Industry knowledge

• GAAP, IFRS, Financial Statements, Time Value of Money,
Break Even, Supply / Demand, Statistics.
• Business models: “how companies make money”.

Tying it all together: a blend of art and science

• Architectural choices, accurate logic, dynamic input
parameters, output reports / charts
• Automating using VBA, trapping potential errors
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2 Preparing for Modeling
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Key steps in Financial Modeling

1. Define & structure the problem: what must be solved?

2. Define the input & output variables of the model: collect data.

3. Decide who will use the model & how often: trade offs between simplicity &
sophistication, one-off & reusability, graphs & data.

4. Understand the financial & mathematical aspects of the model: where is the
complexity?

5. Design the model: what are the relationships between sheets and variables?

6. Build the spreadsheet model.

7. Test the model: assets balance liabilities, totals are consistent…

8. Protect the model: hide or protect cells, sheets or workbooks.

9. Document the model: authoring, dating, versioning, organization, copyrights, disclaimers.

10. Maintain the model: keep history of changes.

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Phase I: Mixing Technique With Business Acumen:

How Front-end Bankers Work

Data collection: Get client/industry data including revenue,

growth, CAPEX, OPEX, financing needs, etc.
Back-of-the-envelope calculations: Beware fuzzy intuitions and
inflated business scenarios. Run a few numbers to figure out if
business makes sense. Initial thinking and analysis are simple,
‐ Does the corporate guy look sober to me?
‐ How soon can I get my investment back?
‐ Is the revenue that he/she is projecting seem greater than the
market size?
‐ Will project generate 100 times return in 6 months?

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Modeling And Reality Check

7 M€ round of financing for a young venture. VC needs 6 x return

after 7 years  37.6% CAGR. Will it fly?
Deal Terms
Current Revenue 10 000 000 €
EBIDTA 2 500 000 €
EBIDTA % of revenue 25%
EBIDTA Multiple 5
Pre-Money Valuation 12 500 000 €
Equity investment 7 000 000 € Post-money investor’s share
Investor's Share 35,9%

Alternate 1: Investor's Required Multiple

Equity investment 7 000 000 €
Investor's required mutiple 6,0
Investment future value 42 000 000 €
Implied IRR 29,2%
Enterprise value at exit 117 000 000 €
Exit EBIDTA multiple 5
EBIDTA at exit 23 400 000 €
Implied Revenue 93 600 000 € Growth needed to fuel multiple
Revenue CAGR 37,6%

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Phase II: Modeling Beyond Gut Feeling

Structured approach to thinking: Once basic numbers make

business sense, dig deeper! This is where you need a complete
financial model.
Structure of analysis: basic finance theories
‐ Cash is king – The more cash is generated from operations the
better the business.
‐ Money today is better than money tomorrow – aka “Time value
of money”.
‐ Money in our pocket is better than in a client / partner / bank’s
one.

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Model Architecture Options
Input Variables Location, Using Worksheets

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Locating Input Variables Options

One dedicated worksheet Input variables facing output
results in same worksheet

Assumptions
Worksheet

Calculation
Worksheets

Output Input and output in

Worksheet
same worksheet

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Using Worksheets: “Deep vs. Wide” tradeoff

One worksheet including input, calculations and output or one worksheet per
issue (ex. financial statements)?

15 tabs: “deep” model

Maybe a good idea to create tabs / company / country / product line, etc. if
their structure is identical for consolidation purposes (“wide” model).
3 identical city tabs, 1 consolidated revenue

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Using Worksheets: Naming Conventions

Use short but meaningful tab names for easier editing especially
when linking formulas.
‐ =IF(ISBLANK('Poland Case & Payer Mix Per Channel
2016'!B44);'Poland Case & Payer Mix Per Channel
2016'!B43;'Poland Case & Payer Mix Per Channel 2016'!B44)
Same
formula

‐ =IF(ISBLANK('Input 2016'!B44);' Input 2016'!B43;' Input

2016'!B44)

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Design Options
Layout, Colors, Printouts, Presentation…

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Layout Options Automatic page break

• Model width and length for

optimal projection and
printing.
• Control page breaks
• Choosing column width and
row height.
• Same or ≠ size?
• Consolidating data.
• Fully expand or
concatenate?
• Formatting cells.
• Use right category
• Show/hide &/or print
gridlines.

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Layout Examples

Which one reads and prints better?

Context, company… and taste-dependent

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Using Colors Wisely

Identify input from calculations

Input values in blue

Input cells in green
Data from other tabs
cells in purple
Calculation cells in blue

• Spruce up the model, but make

sure it reads and prints well,
avoid too much make up!

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Blending Art & Technique in Spreadsheet Design:

Presentation

HOW something is presented is equally important as WHAT is

presented: chose between graphs & data to present results. Be
creative.

Phases Beginning Nb days End

Design & Specifications 16-Mar-15 180 12-Sep-15
Feasibility Study 29-May-15 481 21-Sep-16
Prototyping 04-Oct-15 746 19-Oct-17
Pre-production Run 07-Jul-16 440 20-Sep-17
Project Completion Time 948

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Blending Art & Technique In Spreadsheet Design: User

Interface

Design intuitive user interfaces: input tables, form controls or

VBA User Forms to facilitate data entry & simulation.
1st Funding Round Horizon 01-Mar-15
Prototype Launch Date 16-Mar-15

Combo box

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Blending Art & Technique In Spreadsheet Design:

Input & Output Gathering
Try to keep key input parameters & outputs in the same tab to
visualize What-if changes.
P&L Assumptions 2014 2018
Total Revenue 50 000 000 € 92 824 641 €
5-Year Revenue CAGR 16,7%
Net Earnings as % of Revenue 5,0%

Working Capital Assumptions Base Scenario Sapphire

Accounts Receivable 11,0% 10,0%
Inventory 7,0% 6,0%
Other Current Assets 1,0% 1,0%
Accounts Payable & Accrued Expenses 8,0% 8,0%
Other Current Liabilites 1,0% 1,0%
Working Capital at End-of-Year 2014 5 290 001 € 4 333 334 €
Working Capital at End-of-Year 2018 9 468 114 € 7 627 091 €

Balance Sheet Assumptions 2013 Key Ouput : PV of Changes in Working Capital & Operating Cash Flow
Cash and short-term investments 2 000 000 €
Base scenario Sapphire Change
Accounts Receivable 6 000 000 €
Changes in Working Capital 4 178 113 € 3 293 757 € - 884 356 €
Inventories 4 000 000 €
Discount Rate (%) : 10,0% 10,0%
Other Current Assets 500 000 €
Present Value of Changes in Working Capital 3 178 555 € 1 688 718 € - 1 489 837 €
Accounts Payable & Accrued Expenses 5 000 000 €
Net Operating Cash Flow in 2018 3 196 943 € 3 477 777 € 280 834 €
Other Current Liabilities 500 000 €
Net Cash Position at End-of-Year 2018 14 736 616 € 16 577 639 € 1 841 023 €
Current portion of long-term debt - €
Long Term Debt (less current portion) - €
CommonStock 2 000 000 €

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Blending Art & Technique In Spreadsheet Design:

Isolate Key Drivers
the best models are those that identify four or five key drivers
and focus on the interplay between them
Surgical Payer Mixes (ie. NFZ, Commercial,
Private) Drivers 2015 2016 2017
Standard nb of annual cases for 2 Operating Rooms 3 520
NFZ Patients mix 70,0% 30,0% 50,0% 50,0%
Commercial Patients mix (Insurance Companies) 0,0% 0,0% 10,0% 15,0%
Private Patients mix (out-of-network) 30,0% 70,0% 40,0% 35,0%

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Illustration: Building Pro-Forma Financial Statements

• Young graduate works in strategic planning dpt. at Godzilla Co.

• XYZ company is on deck for potential acquisition: young
graduate is being asked to forecast financial statements and
calculate cash flows to base valuation on.
• Young graduate received last 2 years raw data, and some
assumptions for future earnings.
• Young graduate has less than an hour, his/her boss is on fire…
• Young graduate is hyperventilating. Where to start?

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XYZ Co.
Historical
Data
• Raw data  no formulas in
Balance Sheet, P&L and Cash
Flow Statements.

• No links between statements

 changes in one statement
won’t be reflected in other
statements  balance sheet
won’t balance.

• No formatting.

• No what-if analysis.

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 Step 1: Create
Spreadsheet
Model
• Use color codes to identify input from output.

• Create formulas and links between statements

(hard part).

• Setup anchor date (2013) and increment years.

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Step 2: Build Projections

Use available assumptions:

P&L Balance Sheet
revenue growth = 7% AR growth = 7%
Depreciation = 9% of PP&E Inventories = 6%
Interest expense = 10% of LTD Net PP&E growth = 3%
Preferred dividends flat AP growth = 5%
Common dividends flat Accruals growth = 5%
Tax rate constant @ 40% LTD growth = 2%
No stock issuance
Create common size formulas for OPEX forecasting

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Step 3: Forecast & Format – P&L

use assumptions & common
size % to project revenue,
depreciation, interest
expense & OPEX

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Step 3: Forecast & Format – Balance Sheet

Make sure Balance sheet balances

use assumptions to project AR, Inventories,
PP&E, AP, notes & accrual payables

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Step 3: Forecast & Format – CF Statement

Understand sources & uses of cash to finance growth

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Step 4: Key Data for Management

Basis for valuation, provides go/no-go insight.

Looks professional.
Flexible: can run multiple scenarios.

… in less than an hour.

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Step 5: Dashboard
Highlights KPIs, gets audience excited, makes boss happy (for now), makes
young graduate look good…

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Illustration Takeaways
• Faced a classic example involving building a simple spreadsheet
model based on historical data. Other situations may require starting
from scratch, or using elaborate formulas.
• Used common sense to complete missing information (i.e. COGS as %
of revenue).
• Made sure financial statements linked, and balance sheet balanced
(error checking).
• Used design skills to format templates.
• Provided management with summary data to support decision
(modeler ≠ bean counter).
• Could have refined model with advanced formatting, sensitivity
analysis, etc. but kept assignment under an hour.

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 Building Robust

3 Financial Models: Best

Practices
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Spreadsheet Design Best Practices

No universal standard.
Several attempts to unify best practices: FAST, BPM
Always a trade-off between time to develop, audience level &
expectations, one-off vs. regular usage, fit to problem scope,
etc…
Use your judgment before jumping in.

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Some No-nonsense Best Practices (1)

Keep formats consistent: Use one color for input cells, labels, outputs etc.
Follow same formats for charts and all other visual elements. Consistency is
very important to keep model simple and easy to maintain.

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Some No-nonsense Best Practices (2)

Separate inputs, calculations & outputs: While simple models can have all calculations
done on output sheet, ideally you should have a separate worksheet for doing all the
calculations. This will make your model elegant and simple.

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Some No-nonsense Best Practices (3)

Do NOT hard code values, instead use “assumptions” sheet. Keep all
assumptions in a separate worksheet (called Assumptions) and fetch values
from that. This will help revise financial model easily when assumptions
change.
Use assumption-based formula,
NOT =F28/(1+20%)!

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Some No-nonsense Best Practices (4)

Do NOT use plugs to solve a model (i.e. use Goal Seek to solve circularity, plug
to balance Balance Sheet) use assumptions instead.

• $401 is a “plug” used to balance Assets

with Liabilities & Equity.
• Create formula instead (i.e. AR growth =
x% per year, AR = y% of sales…)

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Some No-nonsense Best Practices (5)

Use named ranges: When trying to debug or modify a model, could be
clueless as to what complex references mean. Instead define names (F5) for
all important values and use them in formulas.

Easier to read than =(C24+C9)/I5

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Some No-nonsense Best Practices (6)

Use helper columns without shame: Resist writing one big formula to solve all
problems. Split your problem in small, meaningful chunks and use helper
columns to solve it. This will make your model easy to maintain.

• Complex formula to design & audit;

• Break it into 4 sub formulas in helper
columns.

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Some No-nonsense Best Practices (7)

Use conditional formatting to highlight relevant stuff: If you are going to
demonstrate scenarios in your model, you can use conditional formatting to
highlight scenarios. You can also use CF to bring key values / areas to user’s
focus.
Symbols capture user’s attention

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Some No-nonsense Best Practices (8)

Use data validation: Getting invalid data into your model can be quite
frustrating. Instead of addressing invalid data thru formulas, avoid them by
using data validation for input / assumption worksheets.

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Some No-nonsense Best Practices (9)

Document: include cover page, explanation sheet, authoring, dating,
versioning, organization, copyrights, disclaimers

Copyright

Title & Context

Content w/ hyperlinks

Authors Version # Date & Hour

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Some No-nonsense Best Practices (10)

Test: include testing in separate sheet or along sheets (ex. Assets = Liabilities
& Equity, totals matches, % are consistent, etc.

Balance Sheet
consistency test

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Module 1 Conclusive Comments

You are now better equipped with design tips and model building
skills. Time to put flesh on the bone.
No model will replace business acumen and common sense 
THINK before you jump in!
Build your model with your client profile & expectations in mind
(yes, your boss is a client).
In Module 2, you will be using additional Excel formulas to solve
business problems. We’ll start easy, then I will gradually
introduce complex and imbricated functions.
I’ll be “e-around”, check out the blackboard for new material.

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