Financial ModelingBy

CA Tapan Kumar Das Co-Founder Qua Nutrition

Start up Leadership Program – 13th Oct 2012

Training Methodology

Presentation - Half an Hour Question and Answer - One Hour

1st Project Analysis - One Hour

2nd Project Analysis – One Hour

Summaries – Fifteen Minutes

What is Financial Model

Representation of an entity’s Financial Statements and Accounts To gain useful insights

Focus on Future results

The Format Includes : Future Financial Picture in an Income Statement Balance SheetCash Flow Statement Other Inputs and Assumptions and Physical Measures

Provide Useful Analysis for Decision Maker

financial model is a decision support tool

It Does not Predict the Future but to understand the Parameters about the Futures

Q : Why it is useful to the Entrepreneur like you ?

5 Reasons Why You Need To Build A Financial Model For Your Start up

To be successful, entrepreneurs and start-up founders - need to have a good handle on their business. - The best way to do this is to build a financial model - which will give greater insight into your company. - It will also make your start-up more attractive to venture capital investors, lenders, or angel investors

Analytical Lens - It is framework for thinking through Business in an objective , critical manner . And construct numbers around each assumptions

Operating roadmap - A model is, by its nature, a chronological way of laying out what you expect to happen and when—and what it will cost—in a very granular manner

Risk Assessment - Identifying the key levers (and sensitivities) of the business helps illuminate the risk points of your startup— in particular, the magnitude of downside risk. For example, at most startups, expenses precede revenue

Scenario Exploration - Models allow for multiple forms of really useful business model analysis. For example: what happens to our break-even point when we lower prices by 10%? Or, how much extra money will we need to raise if sales take a lot longer than we expect? Or, what do margins look like if we hire a direct sales team vs. recruiting a network of affiliates?

Pitch and Sales Tool:Last but not least, models are a great way to bolster your pitch to investors, lenders or strategic partners. At its most basic, the model eloquently explains how much money you need, and how much you will make for the investor or partner.

Uses of Model

To Value a Business Activity Helpful in Planning Situations

Can Answer the followings ; Return on the Money Invested in the Projected When the Project will reach cash Positive Breakeven Point If Return is x% then what could cost for Business Activities How long project can survey without further Investment

Helps to examine the Financial and Physical scenarios ( Productivity and Performance measurement , Expansion , New Capacity building up )

It Does not Answer the Good or bad Ventures But

answer How will the investor get his money with expected return

Q : How it is useful to entrepreneur ?

What is Income Statement

Reflect the Economics of a Business

It is for the Period Components of Income Statement ;

Revenue ( Nature , Growth ) Cost ( Direct , Indirect , Nature ) Profit ( generated from Business Activities ) Depreciation and Tax ( Direct , Indirect )

not the cash the venture earnsIt is Summary of all the Day-to-day Business activities

Q : How it is different from Cash Flow ?

What is Balance sheet

Snapshot of Company’s Financial Position

It shows Assets and Liabilities on a particular date

Assets includes Tangible Assets and Intangible Assets Components of Balance sheet ;

Owners Money Debt Fixed Assets and Intangible Assets Working Capital Misc Expenditure

It is Not a Statement but a Financial Position

Q : How it influence Valuation ?

What is Cash flow Statement

It tracks the cash in the company during the time period

Components of Cash Flows ; Operating Cash Flow Investing Cash Flow Financing Cash Flow

Operating Cash Flow : Reflect the cash come out of the running the Business ( Answers the Working capital Position of the company

Investing Cash Flow : Long term investment in Assets to further the Business

Financing Cash Flow : Capital Flows to the Business

Q : How it influence Valuation ?

Financial Modeling Make Basic – Financial Modeling - Input Excel Sheet ( Quantitative and Qualitative ) - Income Statement for 3- 7 Years - Balance sheet for – 3- Years - Cash Flow for – 3-7 Years - Running the Model ( Manipulating the Inputs while observing the outputs to draw Business conclusions from the result – to bring the Better Performance /use of Resources .

Advanced – Financial Modeling - Debt and revolvers ( alternative funding , Cash flow and Profit impact and risk analysis ) - Depreciation ( affects Net Income , Tax , Assets Purchases , alternative arrangement) - Taxation ( Tax change , Govt Policy change , Revenue collection change, Cash flow ) - Pensions /Retention policy ( affects on Cash flow , risk ) - Capital Leases/ Buy ( affect on Free Cash Flow and Tax, Growth ) - Multiple acquisitions or Projects or Branches or Structure to optimize Overhead - Analysis and Valuation : 1. Valuation , Share Calculations 2. Building Physical Quantities * refer next slide 3. Sensitivities and What-if ( Goal seek model , watching Output while changing the input

Building Physical Quantities

Non Financial Business Metrics ( Input /Output Model ) Like - Business Drivers ( helps for investment needed, Human capital needed , Cost/Productivity )

- Sources of Information ( True Independent Info )

- Financial Parameters input ( Buy/Lease, Debt/Equity ,Working capital Assumption etc )

- Physical Mechanics ( Revenue/ Capex / Unit cost / Profit etc )

Top Investment Banking Interview Questions

How do you Value your Company ( Intrinsic Value or relative Valuation ) What is Discount rate – Cost of Capital How do you calculate cost of Capital – Risk free rate + Market risk Premium What is the Appropriate Numerator for revenue multipleWhen should you value a company using a revenue multiple vs. EBITDA? How would you value a company with negative historical cash flow?How do you calculate unlevered free cash flows for DCF analysis? (Free cash flows = Operating profit (EBIT) * (1 –tax rate) + depreciation & amortization – changes in net working capital – capital expenditures)Two companies are identical in earnings, growth prospects, leverage, returns on capital, and risk. Company A is trading at a 15 P/E multiple, while the other trades at 10 P/E. which would you prefer as an investment?

Different Approach during Financial Modeling

Should you focus on the best case or worst case scenario for your financial statements?How deep should you go in your analysis?What is credibility and how is it achieved?How do footfall and ticket size apply to financial modelling?What are top-down and bottom-up approaches to financial modelling?What is the Break-Even level?What should your final financial statements look like?

Best Practices for Model Constructions

Follow Firm Format ( standard format followed by regulatory requirements)

Include an executive Summary ( Top Level Consolidated Information )

Make Logical Page Breaks on all Sheet

Use Version Control for Future reference

Use Multiple sheets

Consolidated Input sheet and link to the other sheet ( Do not hard code )

Consistency between sheets ( Same year , Column )

Keep a change Log

Q : Will it create comforts for the Analyzer /Investor ?

Business Economic Indicator

Revenue / Customer Cost / Customer Profit / CustomerEBIDTA % to RevenueIndirect Cost / RevenuePBT / RevenueRevenue/EmployeeCost of capital Revenue / Fixed AssetsDebtors DaysCreditors Days

Uses of Model

Question and answer Section for One Hour

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Why and When you need Finance profession

Uses of Model

Case Study -1 & 2 +

Summary