Introduction to Financial Modelling

Course Overview:

This course will teach participants how to construct a financial forecast of any industrial company. Attention is paid both to isolating the business drivers and ensuring that assumptions and results pass reality checks, and to the mechanics of proper treatment of fixed assets, working capital requirements, provisions, equity capital requirements, and the allocation of net cash flows between long term debt, short term debt, and cash.

All required accounting principles are explained as encountered, and only a basic familiarity with spreadsheets is assumed.

Teaching method:

Over the course of the two days participants will build a fully integrated financial forecast – profit and loss account, cash flow statement and balance sheet – for a case company.

The training process is an alternation between discussion of the relevant issues and supervised production of a model and interpretation of its conclusions.

Participants will receive the final version which is a template that can be readily converted to meet their future corporate modelling requirements.

Participants will be required to bring a laptop with Excel loaded to the course.

Course Content:

Day one:

General introduction

• Format of model
• Use of fonts, colours, pagination
• Ratios and reality checks

Participants review spreadsheet model outline and structure

Populating the history

• Cash and non-cash items
• Clean versus statutory profits
• Discontinued operations
• Underlying taxation rates

Participants discuss and enter historical financials for target company

Operating drivers

• Single company models
• Revenues, COGS and S,G&A
• Top down versus bottom up forecasting
• Consolidated groups and segment analysis
• Business lines versus cost structures

Participants discuss forecast drivers for target company and project revenue and EBIT or EBITDA for the group or company

Modelling fixed assets

• Approaches to forecasting fixed assets
• Emphasis on fixed asset turn ratio
• Gross and net fixed assets
• Retirements versus depreciation
• Accounting for disposals

Participants model property, plant and equipment and intangible assets, calculate fixed asset turns, and assess realism of capital expenditure projections

Modelling working capital

• Days of receivables, payables and inventory
• Cyclical companies and structural changes
• Other components of working capital
• Cycles, growth and working capital requirements

Participants calculate historical working capital requirements for target company, discuss forecast drivers, and project balance sheet items and annual movements in working capital

Modelling provisions

• Types of provision and their drivers
• Ongoing accruals versus restructuring costs
• Provisions and valuation

Participants project deferred tax, pension and restructuring provisions for the target company and discuss differences between their drivers and likely forecast assumptions

Day two:

Associates

• Definition and accounting treatment
• Two line forecasting
• Links to cash flow and balance sheet

Participants project profits, dividends and book values for associated companies, and discuss how these line items are reflected in consolidated accounts

Minorities

• Definition and accounting treatment
• Position of minorities within group structure
• Links to cash flow and balance sheet

The distinction is drawn between disparate minority interests and a single large minority interest, and the implied treatment of each.

Participants project profits, dividends and book values for minorities, and discuss their connection to group financial statements

Shareholders’ funds

• Clean surplus accounting and forecasting models
• Retentions and growth
• Modelling issues and buy-backs
• Target financial gearing

Participants model simple accrual of retentions and then add a routine to permit capital increases or decreases

Cash flow statement

• Structure of cash flow statement
• Cash flow from operations
• Cash flow to/from investment
• Cash flows to equity
• Net cash flow = change in net debt

Participants connect cash flows down to change in net debt

Net debt

• Allocating free cash flow
• Long term debt redemptions and issues
• Minimum cash requirements
• Credit revolvers and surplus cash
• Allocating debt to the balance sheet

Participants allocate net cash flow between long and short term debt and cash

Closing the model

• Movements in net debt
• Checking the balance sheet
• Interest charges and iteration
• Calculation of and interpretation of ratios
• Using a model once you have one – scenario analysis

Participants connect and check balance sheets, take interest charges to the profit and loss, and produce and interpret resulting ratios, for various scenarios

Discounts available for multiple participants:

• 3-4 participants: 15% discount per participant
• 5-6 participants: 20% discount per participant
• 7-8 participants: 25% discount per participant
• 9 or more participants: 30% discount per participant