Self-Study Financial Modeling Training – The Way of the Future

If you work in the finance industry, with:

• an unknown economic outlook;
• companies budgets stretched to the limits; and
• unemployment at all-time highs

it is important to stand out from the rest.

Learning and improving your financial modeling skills can help you to do this. At Video Financial Modelling we understand that not everyone can afford training sessions ranging from $500-$2,000 each.

To cater to this Video Financial Modelling has setup a number of self-study financial modeling training courses to cater for people who want the best possible training at a fraction of the cost.  We have training courses to suit all levels of financial modeling expertise.

What differentiates a self-study financial modeling training course from a seminar? Yes, the price, but there are also a number of other factors.

1. Flexibility – given that the training is pre-recorded you can learn at your own pace. If you don’t catch a concept you can easily just rewind the video and watch it again.
2. Quality – since we only do each training course once, we only pick the best instructors to deliver you content.  
3. Ongoing customer support – because we have lowered our cost base, we supply excellent ongoing customer support and can answer your training course questions promptly.
4. Limited risk – we are so confident in our products that we have “try before you buy options” (at a nominal cost) for many of our training courses. If you proceed to purchase the full version the nominal cost will be deducted from the full purchase price.

In addition to the above, the self-study courses are hands-on giving you the best possible practical experience.  

Check the self-study financial modeling training at Video Financial Modelling today. 

 

What are Financial Statements?

Financial statements commonly refer to formal records of the financial actions of businesses, entities and in some instances individuals. The financial statements are used by various stakeholders in making economic decisions.

Businesses which are listed are usually required to prepare and issue their financial statements to their shareholders. In most instances these financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (GAAP) or UK GAAP. In recent times the accounting bodies have been working together to converge these reporting standards.

There are generally four major financial statements which are reported by businesses.

1)      Balance Sheet

2)      Income Statement

3)      Statement of Owner’s Equity

4)      Cash Flow Statement

The Balance Sheet shows an accurate representation of a business’s financial position at a certain fixed point in time. The Balance Sheet has three broad categories, assets, liabilities and owner’s equity. For example a bank loan would be shown as a liability on the Balance Sheet.

The Income Statement can be simply thought of as total revenues minus total expenses (including financing costs) over a period of time, usually a year. The Income Statement is usually based on an accrual basis – meaning that the revenues and expenses are recorded when incurred, not necessarily paid. In general an Income Statement is meant to show the performance of a company. i.e. higher Net Income generally means better performance (all else being equal).

The statement of owner’s equity shows movements in the Owner’s Equity component of the Balance Sheet. You can use a corkscrew account to calculate the movements from the start of the period to the end of the period. In general these movements are usually attributable to:  

• total comprehensive income;
• owners' investments;
• dividends;
• owners' withdrawals of capital; and
• treasury share transactions.

The Cash Flow Statement represents the flow of cash in and out of the business. The statement is usually divided into three categories:

1)      operating activities;

2)      investing activities; and

3)      financing activities.

If you liked this article, check out the financial modelling training or products at Video Financial Modelling. 

Working Capital - Debtors and Creditors

If you've been working or studying in finance you have probably heard of working capital before. If not then you might be wondering what the flip we are talking about. Well working capital is usually defined as current assets less current liabilities. If working capital is positive, the company has enough current assets to meet its current liabilities. If not then the company may have short term liquidity problems. 

In this blog tutorial we are going to look at two components of working capital, debtors or accounts receivable and creditors or accounts payable. 

What are Debtors and Creditors?

Ok, let's first start with Debtors. Debtors are current assets which arise when revenues are accrued but not paid. For example you book a sale of $100 on account, however you receive the cash 30 days from that date. The two entries you would make are:

1. when you book the sale on account - debit debtors/accounts receivable (Balance Sheet item) and credit revenue (P&L item)
2. when you receive the cash - debit cash (Balance Sheet item) and credit debtors/accounts receivable (Balance Sheet item reversing the account entry in (1))

Creditors are very similar to the above. 

Modelling Debtors and Creditors 

Ok, so you should have a good feeling of how this works now, so let's look modelling this. 

In 99% of the cases we can calculate debtor and creditor balances using the following formulae:

Debtor Balance = Revenue Accrual x Debtor Days/Days in Period

Creditor Balance = Expense Accrual x Creditor Days/Days in Period

For a yearly timescale the Days in Period would be equal to 365 days (we'll ignore leap years). 

From here you can find the total cash received or paid from revenue and expenses respectively. Let's look at this from a debtor perspective and utilising a corkscrew account (if you don't know what this is see our Corkscrew Account. What the? blog).

Debtor Account

Opening Balance          50

Add: Revenue Accrual  50 

Less: Cash Received    [x]

Closing Balance             [y]

Firstly let's find y. If we are looking at a year timescale and 30 day debtor days, then our closing balance (y) would be 50 x 30/365 = 4.1. 

Now we need to find x. Rearranging the formula we get: 

Cash Received (x) = Opening Balance + Revenue Accrual - Closing Balance (y)

 = 50 +50 - 4.1

 = 95.9

Ok, that might be a bit of brain dump.... so let's look at some examples. 

Debtor and Creditor Examples

You can follow along with the examples by downloading the Working Capital - Debtors and Creditors YouTube video and the Excel spreadsheet.  

Example 1

You forecast $2,000,000 of sales on credit each year from 2011-2015. Your credit terms are 30 days. What is the size of your debtor/accounts receivable in each of 2011-2015?

Ok, firstly and as always you need to put in a timescale as below:

Next let's put in the Revenue - Accrual. 

Now using the formula Revenue Accrual x 30/365 calculate the debtor balance.

Now you could calculate the cash received, but we will put in one more step. We will find the movements in debtors (i.e. debtor opening balance - debtor closing balance).

Now if we add the above debtor balance with the revenue - accruals we should get the cash received. 

Example 2 - Homework

Now we are not going to go through this example, but we run through the solution on YouTube and you can find the answers in the Excel spreadsheet. So why don't you give the problem a go?

Question: You buy services worth $1,000 every year from 2008 to 2011. You have credit terms of 90 days and you start with a credit balance of $250 at the start of 2008. What is your creditor/account payable balance at the end of 2011?

Take your Excel and financial modelling skills to the next level. Try our Excel and Financial Modelling training courses today. 

 

 

 

Financial Modelling - Sensitivity and Scenario Analysis

If a financial model is setup using best practice modelling techniques then putting sensitivities and scenarios should be simple. What is the difference between a sensitivity and scenario you may be asking. Well a sensitivity only flexes of one input, whilst a scenario flexes multiple inputs.

About the Inputs/Assumptions

At Video Financial Modelling we usually have one assumption sheet for a simple financial model and two assumptions sheets for complex financial models. The two assumptions sheets for a complex financial model are:

1)      A static assumptions sheet – inputs that don’t change over time. For example a scheduled construction end date.

2)      A time-series assumptions sheet – inputs that can change over time. For example inflation indicies.

Setting up a sensitivity or scenario analysis

Below are brief instructions to setup a sensitivity or scenario analysis manager.  

Step 1: The first step in setting up a sensitivity or scenario analysis is to incorporate, what we like to call a scenario selector. The scenario selector is simply a number between 1 and the “maximum number of scenarios you want to run”. For example say you want to run ten sensitivities/scenarios, then the maximum number you’d put in your scenario selector would be ten.

A simple scenario selector would just look like this.

Not much to it is there? Bear with us though. 

Step 2: Now that you’ve got a scenario selector let’s move onto incorporating a simple offset formula. The basis of this formula is to grab the relevant data from the selected scenario. The form of the formula we usually use for this is:

= offset(current cell reference, ,scenario selector) for static pages

= offset(current cell reference, scenario selector,) for time-series pages

Obviously if you have rows/columns in between the actual assumption you use in your model and your input, then you may need to adjust the above formula.

Step 3: So what happens if you want to use scenario 1’s input if you don’t have any data in the selected scenario? Well that is easy, we just add an IF statement in as shown below.

=if(offset(current cell reference, ,scenario selector)=””,scenario 1 cell, offset(current cell reference, ,scenario selector)) – for a static sheet.

Obviously it is nearly the same for a time-series sheet.

The logic behind this is that we don’t have to put all inputs in for every different scenario we do. We just put in the inputs we want to change from the scenario 1 (usually called the base case).

Sensitivity and Scenario Example

You can follow along with the below example by downloading the YouTube video and spreadsheet.

Ok, this might be confusing right now, but once we look at the below example our methodology should become apparent.

Say we had the following inputs and we wanted to find the NPV of equity distributions. Let's assume there are no taxes and our profit is fully distributed to shareholders as there is no debt in the company. 

Now let’s put in a scenario selector (Step 1 above). Obviously this scenario selector will not work on its own, so let’s now put in a an offset formula as per Step 2 above. The result is shown below. Now all our inputs will be moved to the 1st scenario and the formula will be placed where we previously had inputs.

Ok let’s now run a scenario, say scenario 2. Let’s put in rev of 55 and ops of 40. What happens? Because we don’t have inflation (and haven’t incorporated Step 3 above) in we won’t have any inflation.

Let’s change the formula as per Step 3 above to get:

Now we have an active scenario manager which we can change and run scenarios on. Putting it all together you should get NPV of equity distributions of 135 for the base case and 101 for scenario 2. See the below picture or download the spreadsheet to see the workings. 

Now for all of you out there who think you’ve got it why don’t you try this one. Find the NPV of the equity distributions if the inflation is 2.5% for the first five years and 7% for the next five years. Hint: Your scenarios will need to go down the page as this is now a time-series assumption (i.e. changes over time). The NPV of the equity distributions you should come out to be 137. 

If you liked this tutorial, try one of our Financial Modelling or Excel training courses today.  

MOD Function - Bridging the Time Gap in Excel

Say you had quarterly data and you want to collect this data onto a yearly page? How would you go about it? Probably a hundred different ideas came to your head when I raised that question. Video Financial Modelling has seen all of these. One sticks out ahead of the rest, the MOD function. 

Using the MOD function

The MOD function is quite simply awesome. In simple terms it takes a number and a divisor and spits out a remainder. The equation is shown below.

= MOD(number,divisor)

Does that bring back memories of school maths? Well for all of those people who can't remember, here is a couple of examples to help the mental juices:

• mod(11,3)   - 11/3 is 3, with a remainder of 2. So MOD gives us 2. 
• mod(12,3) - yes you guessed it. 0.
• mod(-11,3) - ok so this is getting a bit harder. The answer is 1. Why? Well because the MOD function gives the amount by which a number exceeds the largest integer multiple of the divisor that is not greater than that number. In this case the largest integer multiple that doesn't exceed -11 is -12. Still confused. Have a play around with the function. 

MOD function Example

Ok, so I promised you that I would show you how to grab data from a quarterly page and aggregate it on a yearly page so let's get started. Download the associated YouTube video and Excel spreadsheet. 

We have the following quarterly dates and associated revenue numbers. 

We want to aggregate these numbers on an annual page. Let's firstly put in annual dates in. You can put these on a seperate page or keep it simple and have it on the same page. This is shown below.

Now the magic. Below the quartlery dates, let's put in the following formula. Don't worry we will explain the components soon. 

= EOMONTH(quarter end date, MOD(month(first period ending date)-month(quarter end date),12)

This should look something like this:

Copy this fomrula across. Wow magic... hopefully this formula gives you the year ending for each of the dates? It sure does, now how does it work. Let's break it down:

= EOMONTH(Component 1,Component 2)

• Component 1: quarter end date
• Component 2: MOD(month(first period ending date)-month(quarter end date),12)

The first component should be pretty self explanatory, so let's look at the second component by looking at some brief examples.

Ok given that the first period ending date is always 31 Dec 2012, the month(first period ending date) will always equal 12. Simplifying the formula we get:

= MOD(12-month(quarter end date),12)

There are 4 possible options for the month(quarter end date). 3, 6, 9 and 12. i.e. corresponding to March, June, September and December. Let's look at each in turn.

• March - MOD(12-3,12)=9 
• June - MOD(12-6,12)=6
• Sep - MOD(12-9,12)=3
• Dec - MOD(12-12,12)=0

If you're switched on you should see a pattern above. The result is equivalent to the number of months to the year end. So if we combine this with an EOMONTH formula we will get to the year end. 

Now if we do a sumif formula (as below) we can aggregate the revenue numbers into yearly results.

We should get the following:

 

Now you may be wondering why we didn't just use a Year formula and then a sumif. Well that is definitely another option, but say you now had a monthly construction page and you want to aggregate or lookup this data in a quarterly page. Trust me this happens all the time in project finance deals. Well the answer.... use the above methodology and you can't go wrong. 

If you liked this blog tutorial check out our new advanced training course, Advanced Toll Road Model Training Course. 

For more free blog tutorials go to Video Financial Modelling's Blog.

 

 

 

 

Project Finance - Interest during Construction and Funding Requirements

Introduction

Greenfield (think of new build) project finance deals consist of both construction and operations period. In this blog tutorial we will focus on the construction phase of a greenfield project and find out how to calculate interest during construction, funding requirements and ultimately our required debt and equity drawdowns.  

Required funding during construction

You may be wondering what project costs may be incurred during a typical project finance construction phase. Here are a few of the most common costs:

• Construction costs - amounts which are usually paid from the Concessionaire (SPV) to the EPC contractor
• SPC costs during construction - administration costs, including management staff'ssalary, advisory costs, ongoing insurances etc.
• Upfront bid costs - cost incurred prior to financial close and to be recovered at financial close - advisory costs, consultants, insurances  
• Financing costs - arrangement fees, commitment fees, interest costs, equity yield (often in the form of sub-debt payments), Debt Service Reserve Funding

But how do we fund these costs?

As the majority of project finance deals have no revenue during construction, construction funding is required. 

In the most basic form funding for the above costs comes in the form of both debt and equity. The above costs are aggregated together usually on a monthly basis, with drawdowns on financing facilities assumed to occur at the end of each month period. 

Assuming that the drawdowns occur at the end of the month eliminates any circular reference related to interest during construction. There are however other gremlins (otherwise known as circularities) that we need to look out for such as commitment fees and arrangement fees. We can break these circularities quite easily, but we will save that topic for another day. 

Putting it all together- an example

Download the youtube video and spreadsheet to follow along.  

Ok, so we now know where our funding requirement is coming from and how it is funded. 

Now let's take a look at an example. Say we had the following assumptions:

Note: Let's also assumes there are no commitment fees or arrangement fees (i.e. we'll leave out the gremlins). 

Firstly let's work out our funding requirements. To do this we need to add the construction costs, SPV costs, upfront bid costs and the financing costs together. 

You'll note that we've missed out the financing costs for the moment. 

Now let's setup a corkscrew account for the debt as shown below. Remember in a corkscrew account the opening balance in the current period is equal to the closing balance for the previous period. Because we have a gearing of 80%, the debt drawdown will simply be 80% x the funding requirement. 

Given the debt balances we can now calculate the debt interest payments for each month. This will simply be 6% x opening balance x 1/12 (remember we are dealing in months). 

We can now feed this interest cost back in the funding requirement. 

The equity capital injected is then simply equal to (1-gearing) x funding requirement or equivalently the funding requirement minus debt.

If all has went smoothly you should end up with a debt amount of 121 and an equity amount of 30. 

A quick side note

In most instances, during construction there will be no free cashflow left over after utilising debt and equity. i.e. funding requirements should exactly offset debt and equity drawdowns.

If you like this tutorial you you'll love our financial modelling and excel training courses. Want more free blog tutorials? Check out Video Financial Modelling's blog. 

 

 

 

 

 

 

Free Bonus Excel Shortcuts

Free Bonus Excel Shortcuts

Blog Downloads: Youtube Video    Excel Spreadsheet       Macrostarter

Instructions for downloading your free shortcuts:

• download and copy the Macrostarter.xlsm to your desktop
• go to the windows button in the bottom left hand corner of your computer screen
• search for the folder XLSTART
• drag and drop or copy and paste the Macrostarter.xlsm file from your desktop into the XLSTART folder

Now you're ready. Open up a blank Excel sheet, then open the file you want to work with. Your Macrostarter.xlsm file is hidden in the background. 

Cool Free Excel Shortcuts

So what is contained in the Macrostarter.xlsm file???? Well to give you a clue, we think that these are two of the coolest Excel shortcuts around....

Ok, so maybe you won't be able to guess. 

Well they are....

Number formatting - puts a comma to separate thousands and also puts dashes for zeros - simply push CTRL+SHIFT+C on any number to apply

Date formatting - puts any numbers which are meant to be dates into the following format dd-mmm-yy. i.e. 31-Jan-11 - simply push CTRL+SHIFT+D

These two shortcuts are sure to save you plenty of time formatting your Excel spreadsheet or financial model. 

Do you want to become a Excel shortcut pro? If yes, then check out our Excel Shortcuts training course.

Want other great Excel and financial modelling tutorials for free? Check out the Video Financial Modelling home page.