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Financial Modelling Working with numbers: meanings beyond the excel sheets
Table of Contents
Page
Appendix
1 Spreadsheet Design - Best Practice Top Tips 24
Section 1
Financial Model Development
Section 1 - Financial Model Development
FM Development Flowchart
Financial Modelling Working with numbers: meanings beyond the excel sheets 2
Section 1 - Financial Model Development
Sponsor Developer
Initial idea for the model. Ensures Translates the initial ambitions in to reality.
supporting resources are available. May
User
not have further involvement.
At least one person - usually more.
Owner
Heavily involved throughout whole process
Driving force behind model. Heavily of model development.
involved in objectives setting stage of the
Reviewer
project.
Involved in checking that the model
Project manager
matches initial specification, and contains
Communication between all separate no significant errors.
elements of project team and client
maintained by this person. The problem
solver.
Financial Modelling Working with numbers: meanings beyond the excel sheets 3
Section 1 - Financial Model Development
1. Scope: Purpose of FM
Financial Modelling Working with numbers: meanings beyond the excel sheets 5
Section 1 - Financial Model Development
2. Specify: FM Logic
The logic of the specification should be built from the outputs through
calculations to the inputs
Model logic
Model specification
Financial Modelling Working with numbers: meanings beyond the excel sheets 6
Section 1 - Financial Model Development
Financial Modelling Working with numbers: meanings beyond the excel sheets 7
Section 1 - Financial Model Development
3. Design
Financial Modelling Working with numbers: meanings beyond the excel sheets 8
Section 1 - Financial Model Development
Financial Modelling Working with numbers: meanings beyond the excel sheets 9
Section 1 - Financial Model Development
4. Test
Financial Modelling Working with numbers: meanings beyond the excel sheets 10
Section 1 - Financial Model Development
40,000 100,000
80,000
KRW M
KRW M
20,000 60,000
40,000
20,000
-
2011-03 2011-06 2011-09 2011-12 2012-03 2012-06 2012-09 2012-12 -
Construction expense Cost for operation of equipment 2011-03 2011-06 2011-09 2011-12 2012-03 2012-06 2012-09 2012-12
Incidental expense Operating reserve
Inflation Construction interest
Equity Senior debt
100,000
80,000 33%
KRW M
60,000
40,000
20,000 67%
-
2011-03 2011-06 2011-09 2011-12 2012-03 2012-06 2012-09 2012-12
Financial Modelling Working with numbers: meanings beyond the excel sheets 11
Section 1 - Financial Model Development
% of operating revenue
20,000 150%
50,000
15,000
100%
KRW M
40,000
10,000
KRW M
30,000
50%
5,000
20,000
10,000 - 0%
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
-
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Labor expense General expense
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
CAPEX O & M Cost
Insurance expense Advertising expense
Rent expense Other expense
Toll revenue Other revenue Revenue to expense ratio
80,000
60,000
KRW M
40,000
20,000
-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Financial Modelling Working with numbers: meanings beyond the excel sheets 12
Section 2
Understanding Numbers
Section 2 - Understanding Numbers
NPV is the difference between the present value of cash inflows and the
present value of cash outflows.
To analyze the profitability of an investment or project.
Applied discount rate is an expected rate of return from project
n
CashIni n CashOuti
NPV = i
- i
i =1 (1 + r ) i =1 (1 + r )
n = the time of the cash flow r = Discount rate
CashIni = Cash inflow at time i CashOuti = Cash outflow at time i
NPV > 0: Positive net cash flow with r Project investment accepted
NPV < 0: Positive net cash flow with r Project investment declined
Financial Modelling Working with numbers: meanings beyond the excel sheets 14
Section 2 - Understanding Numbers
IRR is the discount rate that makes the net present value of all cash flows (both
positive and negative) from a particular investment equal to zero.
NPV vs. IRR
NPV: Expressed in monetary value
IRR: Expressed in percentile
IRR > Expected discount rate (r): Project return rate is greater than expected
one Project investment accepted
IRR < Expected discount rate (r): Project return rate is less than expected one
Project investment declined
Financial Modelling Working with numbers: meanings beyond the excel sheets 15
Section 2 - Understanding Numbers
IRR : 6.0%
NPV (6.0%) = 0 : When r = IRR, NPV= 0.
NPV (4.0%) = 69,806 : When r < IRR, NPV > 0
NPV (7.0%) = (31,656) : When r > IRR, NPV < 0
Financial Modelling Working with numbers: meanings beyond the excel sheets 16
Section 2 - Understanding Numbers
Financial Modelling Working with numbers: meanings beyond the excel sheets 17
Section 2 - Understanding Numbers
Fisher effect
(1 + Real IRR) (1 + CPI growth rate) = (1 + Nominal IRR)
Financial Modelling Working with numbers: meanings beyond the excel sheets 18
Section 2 - Understanding Numbers
Financial Modelling Working with numbers: meanings beyond the excel sheets 19
Section 2 - Understanding Numbers
Analysis on Project
NPV > 0 ?
IRR > Expected rate of return ?
Any cash shortage ?
Lenders Analysis
DSCR (Debt Service Coverage Ratio)
Short term debt
DSRA (Debt Service Reserve
Account)
MMRA (major Maintenance Reserve
Account)
Covenant for sub-debt and dividend
payments
Financial Modelling Working with numbers: meanings beyond the excel sheets 20
Section 2 - Understanding Numbers
Operating Expense
Government subsidy
Project IRR or Usage fee
Operating Revenue
Net income from
ancillary project
Financial Modelling Working with numbers: meanings beyond the excel sheets 21
Section 2 - Understanding Numbers
Financial Modelling Working with numbers: meanings beyond the excel sheets 22
Section 2 - Understanding Numbers
Financial Modelling Working with numbers: meanings beyond the excel sheets 23
Appendix 1
Spreadsheet Design - Best Practice Top Tips
Appendix 1 - Spreadsheet Design - Best Practice Top Tips
1. Keep it simple!
l e.g. simple formula; refer input on same sheet, break formulae into multiple rows.
l less risk of confusing yourself and others
l easier to follow the audit trail
l no prizes for complicated formulae
Financial Modelling Working with numbers: meanings beyond the excel sheets 25
Appendix 1 - Spreadsheet Design - Best Practice Top Tips
6. Make column headings consistent, and use the same starting column for each time
series (rule of F14)
l allows for simpler formulas and avoids referencing errors
l multiple narrative columns (A-E) allows for clear labelling
Financial Modelling Working with numbers: meanings beyond the excel sheets 26
Appendix 1 - Spreadsheet Design - Best Practice Top Tips
7. Use protection
l reduces the chance of accidental change
l not for prevention of malicious damage, so dont use worksheet passwords
8. Range names
l makes formulae more readable, particularly when referring to another worksheet
l encourages good design and structure
l can enable a building block approach
l very useful if linking to another workbook
9. Make extensive use of error traps and cross checks, and summarise results on a
single sheet
l makes Excel work to help find mistakes
l quick view to see if errors have been introduced
Financial Modelling Working with numbers: meanings beyond the excel sheets 27
Appendix 1 - Spreadsheet Design - Best Practice Top Tips
10. Use colour coding and formatting in a clear and consistent manner
l e.g. indicates cell types, worksheet categories and conditional formatting highlights exceptions
l provides visual clues to make meaning and intention clear
l reduces risk of inappropriate data being entered
l flags items of interest for investigation
11. Use repeating worksheets with identical structures or repeat calculation blocks
l reduces the work involved in repetitive calculations
l enables punch-through consolidations
l facilitates testing
Financial Modelling Working with numbers: meanings beyond the excel sheets 28
Appendix 1 - Spreadsheet Design - Best Practice Top Tips
15. Treat external links as inputs and do not include external links in formulae
l avoids confusing references and overlong and unreadable formula
Financial Modelling Working with numbers: meanings beyond the excel sheets 29