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    Financial Modelling and Analysis
    Financial Modelling and Analysis
    Financial Modelling and Analysis
    Ebook292 pages2 hours

    Financial Modelling and Analysis

    By Palani Murugappan

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    About this ebook

    Financial Modelling and Analysis using Microsoft Excel for non-finance personnel By Palani Murugappan
    LanguageEnglish
    PublisherBookBaby
    Release dateJul 18, 2014
    ISBN9789671275672
    Financial Modelling and Analysis

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    • 5/5
      Simple explanation, step by step , clear and very useful
    • 4/5
      it is good, quite comprehensive, from excel point of view.

    Book preview

    Financial Modelling and Analysis - Palani Murugappan

    cover

    PREFACE

    Hi all !!

    Welcome to Financial Modelling and Analysis using Microsoft Excel for non-finance personnel!

    Most of you probably know how to use Excel. How many can handle the basic concepts of financial statements, let alone modelling? This is the book for you if you want to learn the the basics of finance using Excel functions.

    This book was written to help any users wanting to have a clear understanding of how Excel can help to perform some aspects of financial modelling and analysis using some of its built-in financial and logical functions. It goes further by elaborating detail exercises on the above. The book introduces the basic concepts of balance sheet, income statement and cash flow and builds the relevant models.

    Many books have been written on Excel. However, this book explains some advanced techniques for sensitivity analysis and features in a rather simplified manner with plenty of screen captures wherever possible. New users and existing users on Excel will find this book handy.

    So, why wait? Get a head start with Microsoft Excel’s financial functions and create your desired models with ease.

    Palani Murugappan

    Email : palani12@yahoo.com

    CONTENTS

    PART 1 : INTRODUCTION TO FINANCIAL MODELLING…1

    Whom this book is for………………………… 2

    Introduction to financial modelling…………… 2

    Analyzing a simple financial mod…………… 3

    Basic financial statements…………………… 5

    Balance sheet………………………………… 5

    Limitations to Balance sheet………………… 9

    Income statement…………………………… 10

    Limitations of the Income statement…………13

    Some terminology…………………………… 16

    How to tell if the Balance sheet work……… 18

    Depreciation…………………………………… 21

    Off Balance sheet financing………………… 22

    PART 2 : UNDERSTANDING LOGICAL FUNCTIONS…23

    Logical functions………………………………………….24

    IF function………………………………………………….24

    Nested IF function……………………………………… 34

    AND function…………………………………………… 40

    OR function………………………………………………. 45

    NOT function………………………………………………47

    Further logical function examples……………………… 49

    PART 3 :UNDERSTANDING FINANCIAL FUNCTIONS…55

    Financial functions ……………………………………………………..56

    FV function ………………………………………………………………56

    Time value of money ……………………………………………………71

    PV function ………………………………………………………………72

    PMT function ……………………………………………………………84

    NPER function ………………………………………………………….96

    NPV function ………………………………………………………….105

    IRR function ……………………………………………………………122

    RATE function …………………………………………………………126

    IPMT function ………………………………………………………….134

    PPMT function …………………………………………………………142

    SLN function …………………………………………………………..151

    SYD function …………………………………………………………..155

    VDB function …………………………………………………………..163

    MIRR function …………………………………………………………174

    To recap ……………………………………………………………….181

    PART 4 : CREATING FORM BUTTONS…183

    Form buttons…………………………………………….184

    Using list to create options…………………………………195

    PART 5 : INVENTORY BALANCE EXERCISE …205

    Creating an inventory system……………………………..206

    PART 6 : CALCULATING LOAN REPAYMENT…215

    Calculating monthly loan repayments………………………….216

    PART 7 :HANDLING BOTTLENECK MANAGEMENT...227

    Handling limiting factors……………………………………228

    PART 8 :CALCULATING CUSTOMER PROFITABILITY...237

    Customer profitability…………………………………………238

    PART 9 : COMMONLY USED TERMINOLOGY..… 245

    Commonly used terminology…………………………………246

    PART 10 : SHORTCUT KEYS AND OTHERS…271

    Shortcut keys………………………………………… 272

    Function keys……………………………………… 272

    Shift key…………………………………………… 273

    Ctrl key……………………………………………….274

    Alt key……………………………………………… 276

    Shift + Ctrl keys………………………………………278

    Principle rules of financial modelling…………………280

    Whom this book is for

    Many books have been written on financial modelling. However, as a corporate trainer myself, I have decided to write this book to cater for the non-finance personnel who may want to know the application of financial modelling using Microsoft Excel (Excel for short). This book is also catered for students or anyone wanting to learn more on the many financial functions available in Excel to perform the relevant financial modelling exercises.

    Introduction to financial modelling

    Many of us have heard of the word modeling especially in the context of data modeling and financial modeling. What does the word model mean? In simple terms, a model represents a scenario of the real application done in a confined manner. For example, if a group of engineers were to build a bridge, they would sit together and build a model of it first to see if it would fit in the actual place. This model will help them understand many factors such as wind, tension, stress, maximum load, etc. Most of the models are done in labs or a confined area.

    In the financial world, the financial modeling refers to models that are used to predict an outcome of financial performance. For example, investing in a property and expecting it to appreciate over a number of years (assuming no natural disaster happens during this period which may then lower the price of property). This is a sample financial model.

    It is important to remember that when reading a pictorial representation of any model, it should be read from left to right. Generally, time periods are on the X-axis moving from current (left) to future (right).

    When designing a model, many often wonder how long one should design the model for i.e. short term or long term. This would really depend on the given scenario.

    For example, if you are looking at a company’s cash flow, then you would ideally look at the next 12 months. However, if your project involves growing trees for timber, then you may need to stretch your model to something like 30 years (the average duration required for trees to grow to its peak).

    Note that when you use a model to predict the company’s cash flow for 5 years, the chances of it being accurate or near accurate is unlikely as no one can predict this! There are just too many external factors that can affect these projections such as the local and global marketing conditions, market trends, acceptance level of product/services, life cycle of product/services, competition from overseas, etc.

    When you plan out your model, it could be based on months, quarters, or years. You should decide what is best. For example, do not make a model with a monthly prediction for 10 years. It would be better to use yearly predictions instead.

    Generally speaking, do not make a weekly model for more than a year; monthly model beyond 3 years; and quarterly model beyond 5 years.

    On a personal basis, I have always used a monthly model for most of my predictions (generally one year and more).

    Analyzing a simple financial model

    Now that you have been briefed on what a financial model is, let us have a look at a simple financial model. The screen capture shows the income (or revenue) predicted for the first 5 years of operations, its related expenses and profit (in value and percentage).

    Let us analyze the above financial model. The income row indicates that income increases gradually over the 5 years. However, the expense also increases over the years. The company maintains a reasonable profit throughout the 5 years. The last row indicates that profit (in percentage) is actually decreasing over the 5 years.

    The formula for the above is as follows (accomplished by pressing the Ctrl + ~ keys. Pressing the same keys once more will remove the formulas from being displayed).

    If you were heading the above company, what would you do to increase the profit margins further?

    Before proceeding any further, you need to understand more financial statements and how to read and interpret them before you can come to any understanding on some cost cutting measures to improve profitability.

    Basic financial statements

    There are three basic financial statements. These are:

    Balance sheet

    Income statement (or sometimes known as profit and loss statement)

    Cash flow statement

    To help understand your company’s financial statement better, it would help if you had some understanding of the above three to create a proper financial model.

    Balance sheet

    The balance sheet indicates the financial position of a company at a specific moment in time. It tells what you own and what you owe on a specific date.  It should be noted that the balance sheet of a company changes from day to day.

    A balance sheet is usually prepared at least once a year to show to all the shareholders and to the public (if it is a public listed company).

    As companies operate on a 12 month fiscal year period, they usually prepare the financial statements at the end of this fiscal year. The financial statements are prepared by accountants and require to be audited (for a private limited and public company).

    The balance sheet is prepared at the end of the fiscal year and sometimes can take months to prepare (quite often outdated when it is ready!).

    A balance sheet has three basic components:

    Assets (anything and everything physical the company owns)

    Liabilities (amount the company owes to others such as banks or other financial establishments)

    Equity (amount the company owes to the investors based on their capital injected)

    You can relate all the three basic components as follows:

    The formula above helps anyone understand how the three components are related. For example, if you decide to purchase a property worth $500,000 (Asset), you have decided to pay a down payment (or initial investment) of $100,000 (Equity). The balance of payment to purchase the property will come in the form of a loan from the bank, for example. In the above, the balance of $400,000 will come from the bank as a loan. This is the known as the liability as you owe this amount to the bank (including the interest and other fees that the bank will impose on you).

    Note that in any balance sheet, the Total assets (commonly displayed on the left side) must always equal to the Owner’s equity plus the Liabilities (typically shown on the right side of the equation).

    Let us analyze another example as below.

    In the ABC Company above, the assets includes what the company owns. The Accounts Receivables arise when the company has sold something on credit i.e. goods has been disbursed but no payment has been received at the point of delivery. Companies usually give credit terms such as 14, 30, 45 or 60 days to make the payment (may include interest charges too).

    The value of $200,000 above in the ABC Company indicates that the company has the right to collect $200,000 from previous credit sales which are still pending. This value also indicates that ABC Company has the legal claim to the $200,000 of Accounts Receivables.

    A point to note there is that if the payment is still not collected after the credit term given, it may be difficult to collect it at a later stage. So, in this case, some companies do provide a provision for bad debts which is Accounts Receivables that are not collectable after a given period (usually written off).

    Some examples of assets in ABC Company may include the following:

    Buildings

    Land

    Investments in stock and bonds of other companies

    Inventory

    Prepaid Insurance (usually paid in advance for a year)

    Copyrights

    Patents

    What then are liabilities? A liability occurs when the company owes something to another. Usually

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