Webinar 3: How to Create a Comprehensive Financial Model
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A financial model is a quantitative representation of a business's financial information that can be used to forecast the future, value a security, determine the benefits of a merger, and answer "what if" questions. It models relationships between variables in mathematical terms. Creating a financial model involves defining inputs and outputs, structuring cash flow projections over multiple years, and identifying risks. The model benefits businesses by identifying weaknesses, optimizing profits, evaluating risks, and saving time in documentation.
Webinar 3: How to Create a Comprehensive Financial Model
- 1. W E B I NA R # 3 J U N E 2 7, 2 01 3 How to Create a Comprehensive Financial Model
- 2. 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.
- 3. 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.
- 4. 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)
- 5. 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.
- 6. 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.
- 7. 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
- 8. 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
- 9. 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
- 10. 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
- 11. Cash Flow Projections Enter monthly revenue Enter monthly expenditure Variable costs Operating costs Debt servicing Calculate net income
- 12. Completing the process Risks Identify possible risks & show how mitigated Cash flow projections – (3 years) Income statement Balance sheet Opening statement or personal financial statement Projected balance sheet Funding Requirements State amount & type – debt or equity
- 13. Applications Basis for sound business activities Financial negotiations Grant funding Investment promotion Feasibility studies Due diligence analysis Management reports
- 14. 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
- 15. 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
- 16. 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