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Financial Modeling in Excel

2010 - 11

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

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Decision Making based on Financial Analysis

Financial Transactions
Analyzed
Entered in the computer
Documents

Reports
Analyzed
Adjusted
Final reports prepared

Computers for
Record keeping

Our area of
focus
Computers for
Analysis

Reports

Financial statements
Prepared
Sent to relevant stakeholders

IS

BS

SCF

Financial Statements

Reports
Analyzed
Decision making purposes

Analysis and Decision Making

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Business reflected in the Statements

Operating

Research
Purchases
Marketing
Sales

Planning

Bank debt
Corporate bonds
Shareholder equity

Financing

Investing
Working capital
Land
Buildings
Machines & equipment
Intangibles

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Agenda

Introduction and context

Understanding an integrated financial Model
Efficiently using excel preparation for modeling
Creating a template for integrated model
Summarizing financial statements
Building Integrated Model Financial Statements & Projections
Understanding recursion and iterative calculation
Using Iteration to update Integrated Model
Building Integrated Model Valuation
Modelling Advanced Accounting Concepts

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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

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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
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 updating the model

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Conditional formatting, circular

references, scenario analysis
and other advanced tools like
solver, etc.

Effective modeling involves an indepth understanding of

financial concepts and MS Excel usage
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How is an integrated model created?

Data Source

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Financial Statements

Analysis

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Integrated financial model A Schematic Flow Diagram

Assumptions

Revenue Drivers

Revenue Build Up

Cost Drivers

Cost Build Up

P&L

Interest

Depreciation

Cash Flow

Valuation

Asset

Assumptions

Asset Schedule
Balance Sheet

Net Block
Financing
Assumptions

Debt Schedule
Debt

Valuation
Assumptions

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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

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Agenda

Introduction and context

Understanding an integrated financial Model
Efficiently using excel preparation for modeling
Creating a template for integrated model
Summarizing financial statements
Building Integrated Model Financial Statements & Projections
Understanding recursion and iterative calculation
Using Iteration to update Integrated Model
Building Integrated Model Valuation
Modelling Advanced Accounting Concepts

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Lets take a moment to understand components of excel

Toolbar

Formula Bar

Cells

Worksheet
Name

Excel 2003 Interface

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 Lets take a moment to understand components of excel

Excel 2003 and 2007 are being widely used in the industry. Most of features of 2007 are backward compatible

Excel 2007 Interface

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CTRL + ALT + V
CTRL + 9
SHIFT + CTRL + 9
CTRL + 0
SHIFT + CTRL + 0
ALT + H + O + I
SHIFT + F11
SHIFT + Spacebar
CTRL + Spacebar
SHIFT + ALT +
SHIFT + ALT
CTRL + Minus sign
F2

Basic Editing and Saving Excel

Save Workbook
Copy
Paste
Cut
Undo
Select All
Bold
Switch Program
Close Program
Switch workbooks
Some Special Shortcuts

CTRL + 1
ALT + H + 0
ALT + H + 9
SHIFT + CTRL + ~
SHIFT + CTRL + !
SHIFT + CTRL + #
SHIFT + CTRL + $
SHIFT + CTRL + %
CTRL + ;
= (equals sign)
ALT + =
CTRL +
CTRL + ~
F9
SHIFT + CTRL + Enter

Paste Special
Hide Row
Unhide Row
Hide Column
Unhide Column
Fit column width
New worksheet
Highlight row
Highlight column
Group rows/columns
Ungroup rows/columns
Delete selected cells
Edit cells

ALT + M + P
ALT + M + D
ALT + M + A + A
CTRL + [
CTRL + ]
F5 + Enter
SHIFT + CTRL + {
SHIFT + CTRL + }

Navigating / Editing
Arrow keys
CTRL + Pg Up/Down
CTRL + Arrow keys
SHIFT + Arrow keys
SHIFT + CTRL + Arrow
Home
CTRL + Home
SHIFT + ENTER
TAB
SHIFT + TAB
ALT +

Move to new cells

Switch worksheets
Go to end of continuous range Select a cell
Select range
Select continuous range
Move to beginning of line
Move to cell A1
Move to cell above
Move to cell to the right
Move to cell to the left
Display a drop-down list

ALT + ENTER
SHIFT + Arrow
SHIFT + CTRL + Arrow
F4
ESC

Formatting
Format Box
Increase decimal
Decrease decimal
General format
Number format
Date format
Currency format
Percentage format
Enter the date
Formulas
Start a formula
Insert AutoSum formula
Copy formula from above cell
Show formulas/values
Recalculate all workbooks
Enter array formula
Auditing Formulas
Trace immediate precedents
Trace immediate dependents
Remove tracing arrows
Go to precedent cells
Go to dependent cells
Go back to original cell
Trace all precedents (indirect)
Trace all dependents (indirect)
Inside the cell Editing
Start new line in same cell
Highlight within cells
Highlight contiguous items
Toggle $
Cancel a cell entry

Change all Inputs to Blue:

Press F5 then Select "Special" then "Constants", "OK then Manually change
selection to blue font color
Change all Formulas to Black: Select "Formulas" instead of "Constants then
change selection to black color

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CTRL + S
CTRL + C
CTRL + V
CTRL + X
CTRL + Z
CTRL + A
CTRL + B
ALT + TAB
ALT + F4
CTRL + TAB

Moving across toolbars in Excel 2003 and 2007

Press Alt Key to activate Main

toolbar
For Example, Alt F for file

Use CTRL + TAB to Go to

next toolbar

Use Arrow key to navigate

further

In 2007, Pressing the ALT key automatically shows the options

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Cell Referencing - $
Use $ for Absolute Reference
A1 vs $A1 vs A$1 vs $A$1

What happens when you copy paste cells

Source

Destination

$A$1

$A$1

A$1

C$1

$A1

$A3

A1

C3

Change the referencing of a cell by F2 + F4

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Formatting Numbers and Other Datatypes

Shortcut to get to Formatting cells: CTRL + 1
Access Standard Types:
Number, Currency, Date, Time, etc.
Custom format can be used for specific
requirements

Custom Type in Excel

#: Show only significant number
If they are not present, nothing is shown

0: Shows insignificant number

Used when showing decimals

;: Separator between +ve and ve

_: Creates a space
Can be used to align decimals
Color
Currency

Separator

$#,## 0.0

+ve Number
Formatting

; [Red](#,##0.0)

- ve Number
Formatting

Zero
Formatting

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No Text

Text
Formatting

Brackets

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Excel As Data Entry Tool

Entering Bulk Data in cells

Restricted
Input Area

Possible
Inputs

Same data in all cells within a range, by

entering information in active cell and
pressing CTRL + Enter
Copying contents of a cell and then pressing
enter
Generate S. No. List by pressing control and
dragging the mouse

Other useful functions

Random number generation using rand()
and randbetween(a, b) functions

Validation Restricting user inputs to

specific values
Options known before hand
Data Validation (ALT + D + L)

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Simple Exercises in Excel

The financials of a startup company are given to you. The company would be eligible
for funding if the average of operating profit margin over 5 year period is greater than
35% and CAGR in revenue growth is greater than 50%. Create a model to check if the
company is eligible for funding. Also visually indicate the eligibility.
Use worksheet A
Hint

Use (P(t)/ P(t-k))^(1/k) -1 to calculate CAGR

Use And function to calculate eligibility
Use if function to print it
Use conditional formatting to output the results

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 Simple Exercises in Excel

A car loan company has lent USD 10000 to person C. The interest rate prevailing in
the economy is 6% per annum. C would be paying an EMI for the next 5 years to the
company. The CFO of the company wants to know, how much of the revenue would be
recognized each month?
Hint
Create an assumptions area, calculation area, etc.
Put the assumptions (whenever referring to assumptions, which are constant remember to
put $)
Use the PMT, PPMT and IPMT functions for each period

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Locking specific areas in your model

Hiding/ Showing a formula in Excel

Select Cell with formula
Go to Format Cell Protection Tab (Alt O + E and Use Control + Tab
to Navigate)
Click on Hidden
Select Tools Protection Protect Sheet (Alt T, P, P)

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Agenda

Introduction and context

Understanding an integrated financial Model
Efficiently using excel preparation for modeling
Creating a template for integrated model
Summarizing financial statements
Building Integrated Model Financial Statements & Projections
Understanding recursion and iterative calculation
Using Iteration to update Integrated Model
Building Integrated Model Valuation
Modelling Advanced Accounting Concepts

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Creating the template for financial modeling

Matrix Integrity across sheets and tower model for within the sheet

Tower Model within sheet

Reduce the size of the first 1-2 columns to create
the headings
Ctrl + arrow keys to move faster from 1 section to
another

Larger column width to put in the names and text

information

Matrix integrity to be maintained across multiple

sheets
Eases copy paste and faster dragging of formulas
Reduces chances of errors in writing the formulas
linked across sheets

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Freeze panes at the right spots to ease navigation in the model

The years (indicating Actual and Projected) are put in one of the top row
Rows and columns are frozen at the intersection of the left hand information column and the years
row at the top
Hint: Shortcut Alt + w + f

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