Financial Modeling in Excel FMCG Case Study

Financial Modeling in Excel
FMCG Case Study
© EduPristine – www.edupristine.com
© EduPristine Financial Modeling
Agenda
Introduction and context
Understanding an integrated financial Model
Efficiently using excel – preparation for modeling
Summarizing financial statements
Building Integrated Model – Financial Statements & Projections
Understanding recursion and iterative calculation
Building Integrated Model – Valuation
Advanced Modelling Concepts
© EduPristine Financial Modeling 2

Excel as the most important tool for modeling
Excel is one of the most widely used tools in financial industry

 Easy to use
 High reach & access to software across geographies
 Flexibility
 Robustness
 Inbuilt features (Most people would not even be using 95% of the features) & Extendibility
 Modular and Object Oriented Architecture
Excel as a data-store
 Easy to store and retrieve information
 Flexibility to put many data-types in the same sheet
Functions and a range of features

 Excel is easily extendible to be used as a Modeling tool
Modeling Context
 Understand the industry models being used
 Create your own models Rather than just using them
 Improve & enhance productivity in work
 Extend these models for your use
 Debug Problems

Decision Making based on Financial Analysis
Financial Transactions
 Analyzed
 Entered in the computer
Documents Computers for
Record keeping
Reports
 Analyzed
Our area of
 Adjusted focus
 Final reports prepared
Reports Computers for
Analysis
Financial statements
 Prepared IS BS SCF
 Sent to relevant stakeholders
Financial Statements
Reports
 Analyzed ?
 Decision making purposes
Analysis and Decision Making

Business reflected in the Statements
 Research
 Purchases
Operating  Marketing
 Sales
 Bank debt Planning

 Corporate bonds
 Shareholder equity
Financing Investing
 Working capital
 Land
 Buildings
 Machines & equipment
 Intangibles

Agenda
Modelling Advanced Accounting Concepts

What is an integrated model?
Having all financial statements and analysis linked with each other, such that updating any
part of the model updates the complete workbook

What is involved in creating an integrated model??
Correct formatting of sheets

and numbers for easy
interpretation and printing
Logically breaking your sheets

into different components
Integrated
financial
model Conditional formatting, circular
references, scenario analysis and
other advanced tools like solver, etc.
With the change in any
key variable, should give
an overall view of all the
changes in decision
parameters
Formulas & Linking numbers in
different sheets for correctly Effective modeling involves an indepth understanding of financial
updating the model concepts and MS Excel usage

How is an integrated model created?
Data Source Financial Statements Analysis

Integrated financial model – A Schematic Flow Diagram
Assumptions
Revenue Drivers Revenue Build Up
P&L
Cost Drivers Cost Build Up
Interest Depreciation Cash Flow Valuation
Asset Assumptions
Asset Schedule
Net Block Balance Sheet
Financing Debt Schedule

Assumptions
Debt
Valuation
Assumptions
10
© Neev©Knowledge
EduPristineManagement
Financial Modeling
– Pristine 10
Key aspects of Modeling & Excel Usage
Building a ROBUST model is a must for other people to use your model
 It should generate the correct results
 It should have proper area for Inputs/ Outputs
 It should be able to handle errors properly
 Naming/ Labeling of data items should be done properly
 Accidental changing of model parameters should be avoided
 The model should be easy to understand on computer and in printout
 Reusable components can be made in the excel sheet, which can be made later
SPEED is the key in modeling

 A large model might have multiple excel sheets and a lot of formulas and calculations. It is necessary to
navigate through the excel sheet in a speedy manner and understand it
 It is a fact that mouse is 5 times slower than using the keyboard to use excel. Due to heavy involvement of the
users, having a strong command over the keyboard shortcuts is a must!
 A well designed excel sheet is easy to understand as well

Agenda

Introduction to Income Statement
Non Cash
Expenses
Revenue
Wages
material
Cost of Goods
Overhead Sold
Gross Profit Depreciation
Salary
Sales
SG&A
EBITA Marketing
Amortization
Operating Profit (EBIT)
Interest
Profit before tax
Income Tax
Taxes
Deferred
Net income Taxes
Net
Income
Production Suppliers Employees/ Non-Cash Support Staff Sales Advertising Non-Cash Debt Govt. Non-Cash Equity
Employees Suppliers Investors Investors

Introduction to Balance Sheet
Current Assets Current Liabilities
Sources of Funds
Long-term
Investment Long-term Liabilities
Fixed Assets (Property,

Shareholders’ Equity
Plant & Equipment)
Use of Funds • Capital Stock
• Additional Paid-in
Capital
Intangible Assets
• Retained Earnings
Other Assets
Total Assets = Total Shareholder’s equity + liabilities

Cash Flow
Cash Inflow Cash Outflow

 From Operating Activities  To Operating Activities
• Decrease in inventory(sale) • Increase in a/c receivable
• Decrease in a/c receivable • Increase in inventory
• Increase in a/c payable • Decrease in a/c payable
• Increase in bills payable • Decrease in bills payable
 From Investing Activities • Taxes paid
• Disposal of property, plant, • Interest paid
equipment  To Investing Activities
• Disposal of intangibles • Purchase of fixed assets
• Receipt of interest • Purchase of intangibles
• Receipt of dividends • Acquire business
 From Financing Activities  To Financing Activities
• Issue of equity • Repay debt
• Borrow debt • Buyback equity
• Pay dividend

Adjustments in Cash Flow Statement
Add to Deduct from Effect on

Net Income Net Income Net Income
Current assets
Depreciation expense
Accounts receivable (net)
Inventory Amortization expense
Prepaid expenses
Current liabilities Depletion expense
Accounts payable
Accrued liabilities Losses
Income taxes payable Gains
Change in Current Assets Non Cash Items

Working of a company – Financial Perspective
2 Balance Sheet 1 Capital Supplied
LIABILITIES
ASSETS
• Current Debt
• Current (Short-
• Long-term
Term)
• Fixed (Long-Term)
• Other Shareholder’s
EQUITY Stock
Cash Flow Retain Return

Sell Equity
Issue Debt
<Buy Assets> Retain Profits of “repay”
3 <Buy Inventory> 4 debt-holders (with Interest)
Make Sales and stock holders with
<Pay Costs> dividend
<Pay Taxes>
<Pay Interest>
<pay Dividends>

Agenda

Agenda – Building an Integrated Financial Model
Integrated Model – Inputting the Historical numbers

Integrated Model – Calculating drivers
Integrated Model – Creating Asset and Depreciation Schedule
Integrated Model – Forecasting P&L and Balance Sheet
Integrated Model – Creating Tax Schedule
Integrated Model – Creating Working Capital and Term Loan Schedule
Integrated Model – Creating Cash Flow Schedule
Integrated Model – Creating Equity Schedule
Integrated Model – Ratio analysis
Integrated Model – Valuation by DCF
Integrated Model – Valuation by Comps
Integrated Model – Scenario Analysis

Start building the model by inputting the historical numbers
Revenue and Cost Build Up Schedule
Input the historical numbers in different font color (usually Blue) for easy identification
Use the subtotals as formulae and not constants

 All formulas are inputted in different colored font (usually Black)

Start building the model by inputting the historical numbers
P&L
Input the historical

numbers in different font
color (usually Blue) for easy
identification
Use the subtotals as

formulae and not constants
 All formulas are inputted
in different colored font
(usually Black)

Historical Balance Sheet and Building Integrity check
The balance sheet has to balance

each year
 Check for the total liabilities to be
equal to total assets



Building the assumptions in the model –
Historical growth drivers for P&L
Historical Growth
CAGR over the

past few years
P&L drivers
 Growth rate/ CAGR in the sales
 Cost/ Other accounts as
• %age of sales
• Component cost estimates
(Bottom up measure)
• % age of other accounts
 Depreciation and interest to be
factored in separately
Bottom up estimate of
components

Historical growth drivers for Balance Sheet
Balance sheet drivers

 Cost/ Other accounts as
• %age of sales
• Days of inventory/ payables,
etc
• % age of other accounts
 Net debt and Gross/ Net Block

to be factored in separately
• Component cost estimates
(Bottom up measure)
Days of Asset = {(Beginning Asset + Ending Asset)/2}/(Sales in the year/ 365)

Projecting for P&L
Assumption
Project the growth
drivers for the future
based on
 Management
Discussion
 Research reports
 Sanity check on
Use the projected drivers to create the
historical numbers
projected P&L

Building the Revenue Sheet in the model –
… Projecting for P&L

Building the Cost Sheet in the model –
… Projecting for P&L



Building Asset Schedule and Depreciation Expense
… Projecting for P&L and Balance Sheet
Capex
Assumptions
Build the assumptions regarding the capex schedule

 Can be obtained from discussion with the management
 Can be broadly based on the sales assumption, incase management discussion is not available
• Capex would generally not follow a linear growth with sales. It would be step growth

… Projecting Capex schedule and Depreciation Expense
Based on the depreciation policy of the company project the depreciation for each of the investments
for each of the years
 Usually SLM is used for accounting purpose
 Separate depreciation schedule is projected for tax purpose, can create deferred tax asset/ liability.

Linking Gross Block and Depreciation Expense to the respective
Statement
Once depreciation is known, the Gross Block and Acc. Depreciation is calculated and corresponding Balance Sheet
and P&L cells are filled up by linking them to the Asset Schedule sheet
Net Block of
Fixed Assets
Depreciation
Item in P&L
linked to Asset
Schedule



Projecting the P&L
Items yet to be projected

Projecting for Balance Sheet
Assumption
Using the projected driver, create projections for future balance sheet assets/ liabilities. Specially useful for working
capital accounts like
 Inventory
 Accounts receivable
 Accounts payable
Ending Asset = {(Days of Asset)*(Sales in the year/ 365)*2} - Beginning Asset

Projecting Balance Sheet
Items yet to be
projected

Way forward ...
Assumptions
Built
Partly Built
Revenue Drivers Revenue Build Up
P&L
Cost Drivers Cost Build Up
Interest Depreciation Cash Flow Valuation
Asset Assumptions Asset Schedule
Net Block Balance Sheet
Financing WC & Term Loan and

Assumptions Equity Schedule
Debt Tax Schedule
Valuation
Assumptions
To be Built



Projecting Tax Schedule
Create Tax Schedule using data from P&L, Asset Schedule and Assumption Sheet
Once Tax payable and Deferred

Tax Liability is known, the
corresponding P&L cells are
filled up by linking them to the
Tax Schedule sheet



Constructing the Working Capital and Term Loan Schedule
The Working Capital Schedule is constructed in 4 simple steps:

 Link the Current Assets (excluding cash & margin money) and Current Liabilities from Balance Sheet
 Calculate the working capital requirement for a particular year
 Calculate the portion of the working capital funded by Cash Credit or Overdraft facility
 Link the corresponding cells in the Balance Sheet and P&L

Use Assumptions
and BS to Model
the Secured and
Unsecured Loans
Calculate the
Interest to be paid
on Secured and
Unsecured Loans
using Assumptions
Items to be filled,
once the CFS is
Modeled
The Secured and Unsecured Loan Schedule is constructed in 4 simple steps:

 Debt Repayment and New Issue Assumptions are taken from the Assumption sheeet
 The Secured and Unsecured Loans are calculated on that basis
 Cells Representing Fresh Issue and Additional Repayment are kept blank and will be filled after preparing CFS
 Once the schedule is complete the corresponding cells in the Balance Sheet and P&L statement are updated by appropriate links

Calculated based on
Assumption given in
the assumption sheet
Margin Money with

bank is calculated
based on amount of
bank guarantee
sanctioned
The interest expense is calculated on the average loan outstanding
The two Components of Other Income are:

1. Interest earned on “Margin Money” deposited with bank and
2. Return earned on “Investments” shown in the Balance Sheet
Link the issuance charge related to bank guarantee, margin money and other income to the
respective cells in P&L and Balance Sheet



Building the Cashflows – Operating Cashflow
We begin the Cashflow sheet by sourcing PAT, depreciation, Deferred Taxes and interest expense from the P&L sheet
Next, we calculate the Net Change in Working Capital by adding increase in Current Liabilities Items and subtracting
increase in Current Assets Items from the Balance Sheet (except the cash line item)

Building the Cashflows – Investment Cashflows
We calculate the Cashflow from Investing Activities by linking the Cashflow to Asset Schedule, changes in WIP and
Investments from Balance Sheet.

Building the Cashflows – Financing Cashflows
The Cashflow from Financing Activities are obtained from Assumptions on Equity Issue and Debt Issue
(Repayments), and Dividends paid
Note: Net Cashflow calculated above is the sum of all the three activities – Operating, Investing and Financing

Building the Cashflows – Cash & Cash Equivalent
Once the Cashflow is prepared, the Closing Cash Balance (which is sum of Opening Balance and Net Cashflow in the
same year) is fed into the cell for Cash & Cash equivalent in the Balance Sheet

Building the Cashflows – Funding Covenants Testing
The Funding Covenant schedule is modeled in the Cashflow Statement
 to know the surplus or shortfall in cash requirement

• Surplus amount use to repay the debt
• Shortfall amount use to calculate the portion of incremental Debt and Equity to be raised in a particular year
Once the Cash flow Statement is completed, the corresponding cells in the Working Capital and Term Loan
Schedule , Balance Sheet and P&L statement are updated by appropriate links.
Note: This exercise will create circular referencing



Circular References – Issues and Use
When a formula refers back to its own cell either But you might need to iterate to find your solution
directly or indirectly  Circular reference is like a recursive definition
 Significantly impacts performance as it can iterate  Can be used for repeated recalculation until the
indefinitely error reduces to insignificant number
 Generally because of errors in dragging and
dropping formulas
 If you get an error in your sheet, it can propagate
throughout your model and might not go away

Recursive problems
Consider the following problem

 Pristine starts business with a balance of Rs1000 Mn in
bank
 Pristine has negotiated a deal with its bank that it
would be paid an interest (Floating) on average of
opening balance and closing balance for the month to
be fixed at the start of the month
 Pristine has a requirement of Rs. 5 Mn Cash each
month
 Create the cash schedule for Pristine
Issue:
 Closing balance is dependent on interest earned and
interest earned is dependent on closing balance!
Create a complete model for the problem

Using Circular Reference for recursive problems
Turn on Iterative Calculation in Excel to

let excel iterate and find a solution to
the problem
Clear difference in results

because of iteration

Remember – Iteration is a double edged sword!
Always put switches in your model to turn off

iterative calculations
 Enables faster loading of sheets
 Enables debugging of your model

Circularity in the Integrated Model
A fully integrated financial model in excel will have circularity in it due to the following circular linkage
 Interest Earned (Expense) feeds into PAT on the P&L sheet
 PAT feeds into the Cashflow sheet
 Cashflow sheet in turn determines the balancing Cash / (Overdraft) for the year
 Finally, the Outstanding Cash / (Overdraft) determines the Interest Earned / (Expense)
Interest Earned
/ (Expense)
Debt Schedule Sheet
Cash / (Overdraft) PAT

Balance Sheet P&L Sheet
Cash Flow
Cashflow Sheet
Circularity in the model due to linkages between Cash/ (Overdraft) and

Interest Earning / (Expense)



Building the Equity Schedule
Calculated based
on the share
issued and
premium
received on each
share issued.
Once the Equity
schedule is
completed, the
Add PAT and Reduce cash corresponding
outflow to shareholders from cells in the
the opening balance to get the Balance Sheet
closing balance of retained are updated by
earning. appropriate
links.



Ratio Analysis

Ratio Analysis – Profitability and Growth Ratios
 Profitability Ratios
 Profitability ratios determine the profit margins made by a Company
 We can calculate EBITDA margin, EBIT margin, PBT margin and PAT margin by dividing EBITDA, EBIT, PBT and PAT by Revenues
respectively
 The Y-o-Y trend in the margins convey important information about improving or deteriorating cost structure of the company
EBITDA margin is
EBITDA divided by
Revenues Growth rates
determined as
(Current Year
Value – Last
PAT margin is PAT Year Value) /
divided by Revenues Last Year Value
 Growth Ratios
 Growth in different P&L line items are calculated as
(Current Year
Value – Last Year Value)/ Last Year Value
 The trend in growth rate can be increasing, stagnant or
falling, depending on the phase of the company product
in its product life cycle

Ratio Analysis – Return Ratios and Leverage Ratios
 Return Ratios
 The return ratios shows percentage return earned by company assets (in the case of RoAA) or the equity owners (in the case
of RoAE)
 Equity investors would typically be interested in earning a minimum hurdle rate in their investments. In such cases, the investors
look at the return on average equity (RoAE) for guidance
Return on Average
Equity (RoAE) is
PAT divided by
Average Equity
Interest Coverage is calculated as

EBITDA divided by Interest Expense
 Leverage Ratios
 Leverage ratios indicate the extent to which a company is debt levered.
Therefore, higher the proportion of debt funding as % of total capital,
higher is the leverage ratio
 Interest Coverage ratio, calculated as EBITDA divided by Interest
Expense, indicates the no. of times the interest obligation is secured by
the operating level profit
 Similarly, the quick ratio indicates liquidity of the company to serve immediate payment commitments

Agenda


Agenda – Building an Integrated Financial Model - Valuation


Valuation
Valuation
Relative Absolute
Valuation Valuation
Equity Valuation Equity Valuation

 P/ E Multiples  Free Cash Flow to Firm (FCFF)
Enterprise Valuation Enterprise Valuation
 EV / EBITDA Multiple  Free Cash Flow to Equity (FCFE)
 EV / Sales Multiple  Dividend Discount Method (DDM)
 Multiples can be calculated from both trading comps
or transaction comps
 Enterprise Value
Enterprise Value,
calculated as sum of
Cash Equity and Net Debt
Debt Net Debt1
Assets
 Equity Value
Assets Equity
Equity Value calculated as
Equity No of shares multiplied by
Share Price
• 1 Net Debt = Debt - Cash

Absolute Valuation Technique
Free Cash Flow to Firm (FCFF)

 Free Cash Flow to Firm represents the cash flows to the enterprise, which includes cash flows to
both debt and equity investors
 FCFF is calculated as:
 FCFF = EBIT X (1 – Tax Rate) + Depreciation – Capex – Increase in Working Capital
 FCFF has to be discounted by the Weighted Average Cost of Capital (WACC) of the company, to
arrive at the enterprise value
Free Cash Flow to Equity (FCFE)

 Free Cash Flow to Equity represents the cash flows to the equity investors only, after servicing
obligations towards debt investors
 FCFE is calculated as:
 FCFE = PAT + Depreciation – Capex – Increase in Working Capital + New Debt Issues – Principal
Payment on Debt
 FCFE has to be discounted by the Cost of Equity to arrive at the equity value

65
Using Free Cash Flow to Firm (FCFF) to arrive at Enterprise Value
 We calculate the Free Cash Flow to Firm (FCFF) using the formulae for FCFF, for each of the projected years
FCFF calculated as EBIT X (1 – Tax Rate) +

Depreciation – Increase in Working
Capital – Capex and Increase in WIP
 We then calculate the Cost of Equity using CAPM and the post-tax Cost of Debt
 Using the cost of equity, post-tax cost of debt and the target capital structure ratio, we calculate the Weighted Average Cost of
Capital (WACC) of the company, for discounting the FCFF
Cost of Equity is calculated using the WACC = % Debt in the

CAPM formula : Cost of Equity = Risk Capital X Post-tax Cost of
free rate + Beta X Market Risk Debt + % Equity in the
Premium Capital X Cost of Equity

Using Free Cash Flow to Firm (FCFF) to arrive at Enterprise Value
 The Terminal Value is calculated assuming a terminal growth on last projected FCFF and computed WACC
Terminal Value = FCFF in
FY14P X (1 + Terminal
Growth Rate) / (WACC –
Terminal Growth Rate)
 We then calculate the Discount Factors for each of the projected years using the WACC
 Then, we calculate the present value of each projected year’s FCFF and the terminal value using the corresponding year’s discount
factors
 We add up the present value of projected FCFF and terminal value to arrive at the Enterprise Value, from which we can calculate
the Equity Value, deducting the current net debt amount
Discount Factor
for Year N = 1 /
(1 + WACC) ^ N
Present Value of FCFF in year N = Estimated FCFF in year N X

Discounted Factor in year N



Relative Valuation Technique
We calculate the industry trading multiples from the trading comparables table
All the EV and Mcap numbers are in Rs Lakhs
We can then multiply the median of industry forward multiples with corresponding projected P&L line item of
the Company to arrive at the enterprise value or the market capitalization of the company
 Median of Industry FY10E EV / Sales Multiples X Company FY10E Sales = Enterprise Value
 Median of Industry FY11E EV / EBITDA Multiples X Company FY11E EBITDA = Enterprise Value
 Median of Industry FY10E P / E Multiples X Company FY10E PAT = Market Value of Equity

We can similarly calculate the industry transaction multiples from the transaction comps table

During the multiplication, we should look at the multiple and understand what it should get multiplied
with, and what would be the net product
Median of Industry FY10E EV / Sales Multiples X Company FY10E Sales = Enterprise Value
Median of Industry FY10E P / E Multiples X Company FY10E PAT = Market Value of Equity



Scenario Analysis on the Share Price Value
We can create scenario analysis on the Enterprise Value for various assumptions of WACC and
terminal growth rates
For that, we have to link the Enterprise Value from the valuation sheet to the cell in top left hand
corner of the scenario table

Scenario Analysis on the Share Price Value
We select the entire area of the table including the cell containing the formula, and the rows and columns
containing the hard coded numbers for different scenarios and press [ALT + D + T]
 In row input cell, we link the

cell containing assumption
for terminal growth rate
 In column input cell, we link

the cell containing the WACC
value
We finally have the output scenario analysis

table as shown in here 

Thank you!
Contact:
EduPristine
702, Raaj Chambers, Old Nagardas Road, Andheri (E), Mumbai-400 069. INDIA
www.edupristine.com
Ph. +91 22 3215 6191
© EduPristine – www.edupristine.com
© EduPristine Financial Modeling

Financial Modeling in Excel FMCG Case Study

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Financial Modeling in Excel FMCG Case Study

Caricato da

Copyright:

Formati disponibili

Financial Modeling in Excel

FMCG Case Study

Introduction and context

Understanding an integrated financial Model

Efficiently using excel – preparation for modeling

Summarizing financial statements

Building Integrated Model – Financial Statements & Projections

Understanding recursion and iterative calculation

Building Integrated Model – Valuation

Advanced Modelling Concepts

© EduPristine Financial Modeling 2

Excel is one of the most widely used tools in financial industry

Functions and a range of features

© EduPristine Financial Modeling 3

© EduPristine Financial Modeling 4

 Bank debt Planning

© EduPristine Financial Modeling 5

Introduction and context

Understanding an integrated financial Model

Summarizing financial statements

Building Integrated Model – Financial Statements & Projections

Understanding recursion and iterative calculation

Building Integrated Model – Valuation

Modelling Advanced Accounting Concepts

© EduPristine Financial Modeling 6

© EduPristine Financial Modeling 7

Correct formatting of sheets

Logically breaking your sheets

© EduPristine Financial Modeling 8

Data Source Financial Statements Analysis

© EduPristine Financial Modeling 9

Revenue Drivers Revenue Build Up

Interest Depreciation Cash Flow Valuation

Net Block Balance Sheet

Financing Debt Schedule

SPEED is the key in modeling

© EduPristine Financial Modeling 11

Introduction and context

Understanding an integrated financial Model

Summarizing financial statements

Building Integrated Model – Financial Statements & Projections

Understanding recursion and iterative calculation

Building Integrated Model – Valuation

© EduPristine Financial Modeling 12

© EduPristine Financial Modeling 13

Current Assets Current Liabilities

Fixed Assets (Property,

Total Assets = Total Shareholder’s equity + liabilities

© EduPristine Financial Modeling 14

Cash Inflow Cash Outflow

© EduPristine Financial Modeling 15

Add to Deduct from Effect on

Change in Current Assets Non Cash Items

© EduPristine Financial Modeling 16

2 Balance Sheet 1 Capital Supplied

Cash Flow Retain Return

© EduPristine Financial Modeling 17

Introduction and context

Understanding an integrated financial Model

Summarizing financial statements

Building Integrated Model – Financial Statements & Projections

Understanding recursion and iterative calculation

Building Integrated Model – Valuation

Ending Asset = {(Days of Asset)(Sales in the year/ 365)2} - Beginning Asset