1. Financial Modelling Introduction

2. What Is a Financial Model ? A financial model is a forecast for a specific business of key financial information, usually done in MS Excel, that uses a set of assumptions, in order to see the financial effects of decisions.

3. What are the benefits of a financial model? Accounting packages are historical, while business owners and managers need forward looking information, to make decisions. Financial models are key to any financing decision – a bank will usually want to understand future cash flows Key to any major capital investment – we want to understand the return on capital invested Important in a sale of the business or raising of capital – investors want to understand future profits and cash flows to estimate future share price and dividend stream

4. Key financial information Focuses on key financial aspects – cannot contain all information; it needs to summarise information eg look at sales by major product group, not by every single product

5. Key Aspects – Example Sales information ProductCategorySales Dog food X LargeDog food10 500 Dog food LargeDog food10 000 Dog food Medium Dog food20 000 Cat food LargeCat food25 000 Cat food MediumCat food20 000 Cat food smallCat food10 000 Total95 500 CategorySales Dog food40 500 Cat food55 000 Total95 500 Detail Summary

6. Typical key information (historical) Sales volume (units or monetary) Product costs Variable costs – costs that vary depending on sales volume eg sales commission or delivery expenses Fixed costs – costs that do not vary when sales volumes change eg rent

7. Typical key information (historical) Sales growth – price and volume Gross profit margins. This can be overall, split per customer group or product group Cost as % of sales – useful for variable costs Inflation Interest rates Tax rates

8. Typical Assumptions Sales growth – price and volume Gross profit margins. Variable costs (eg % of sales) Fixed costs – current cost + inflation Planned capital expenditure (new machinery) Planned changes – new staff, new premises Interest rates Tax rates Constraints – which is how much more you can sell or manufacture given the current business eg given your current factory size and layout, you can only expand by another 10%

9. Modelling Process Gather Historical Data Determine Key Ratios and Drivers of the Business Determine Assumptions Build Input Sheets Build Calculation Sheets Build Output Sheets Audit