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Car Indicators – How they can help you model in Excel

How could flickering car indicators possibly help you model in Excel. All will be revealed below.

On, off, on

Think about what happens when you put your car indicator on. The light flicks on, then off, then on and so on, right? A similar concept can be used in Excel modelling to simplify often quite complex problems.
Introducing binary indicators. Similar to car indicators, binary indicators turn on and off. If you’re not familiar with the world of binary operators then below is a brief description. When a binary operator is equal to:

• 1 it is on – an illuminated car indicator
• 0 it is off – non-illuminated car indicator

Yeah, yeah, that is great, but how can these binary indicators help me in Excel? Well let’s take a look at a couple of examples.

NOTE: You can follow these examples yourself by downloading the Excel spreadsheet and watching the YouTube video.

Example 1

Imagine you’re asked to model construction costs for a project based on the following assumptions:

1. Construction costs are $500,000 per month
2. The construction period runs for 2 years from 1 January 2011 to 31 December 2012

How would you go about modelling this in Excel? Some of you may say that’s easy… I would just do the following formula:

=500,000 x IF(AND(1 January 2011<=31 December 2012),1,0) or IF(AND(1 January 2011<=31 December 2012),500000,0) – see Figure 1

 

Figure 1: Long and cumbersome formula for Example 1

Whilst this works, the formula is long and cumbersome. This can cause troubles for external parties such as model auditors, may cause you to lose your mind trying to work out what you did previously and the construction IF statement cannot be used again in other formulas (you will see what we mean in a second). Don’t despair we can break this down into much more manageable components as follows:

1. Input the assumptions Construction Cost per month, Construction Start Date and Construction End Date
2. Create a Construction Indicator line: =(1 January 2011<=31 December 2012). Notice that we have got rid of the AND logical function. The new formula will create a one when the formula is true for both of legs and a 0 when at least one of the legs is false. Note that this Construction Indicator can be used in other construction period formulas (hence this construction indicator can be referred to over and over again)
3. Construction Costs: Multiply the Construction Cost per month by the Construction Indicator created in (2)

See Figure 2 for the above workings.

 

Figure 2: Simpler and easier to understand solution for Example 1

What do you think? Is this a lot easier to understand than the original formula? Let’s take a look at another example.

Example 2

Our next example asks us to sum the number print media sources from an online survey. See Figure 3.

 

Figure 3: How’d you find out about us categories

How do we solve this problem? Let’s use our binary indicators (aka car indicators) in conjunction with an OR function. Noticing that there are only two print media sources we would input the following formula:

= OR(How’d you find out about us data=”Newspaper”,How’d you find out about us data=”Magazine”)*1 – see Figure 4

You’ll note that we have multiplied the OR function by one. This is because the OR function alone will only return TRUE or FALSE. If we multiply the OR function by 1 then we will get 1 for TRUE and 0 for FALSE.
Now copy and paste this formula down. Add all the 1’s using the SUM function and you’re done. You should end up with something similar to Figure 4.

 

Figure 4: Solution to Example 2 along with formula for OR function

You now know how many print media sources are included in the survey.

NOTE: Example 2 could have been solved using a COUNTIF function; however that’s a topic for another day.

So now you see. Those flashing things called car indicators really do help you to model in Excel.
If you like this Blog, check out our Excel Functions training course which has plenty more tips and tricks.

Mini-Perms in Project Finance

In this blog tutorial the Video Financial Modelling team dives into the world of mini-perms. And no we are talking about those 80’s hairstyles. 

What are Mini-Perms?

Mini-perms are lending instruments which are intended to be refinanced out after a short timeframe usually 5-7 years. A number of project finance and PFI deals have been done using a mini-perm financing structure given the lack of liquidity in the long term lending market post the GFC. In this tutorial we will look at why mini-perms are being taken up, the different types of mini-perms and the issues related to these instruments.
Why are mini-perms being taken up?

Mini-perms have been promoted by banks, in a large number of financial markets, including in the UK PFI market. The main reasons for their use include:

       i.           concerns over long-term liquidity – an example of this is the introduction of Basel III outlining a global regulatory standard for capital requirements;

      ii.          the banks’ inability to underwrite and syndicate deals, with the resultant dependence on bank clubs for funding. i.e. banks are being forced to lend and hold; and

     iii.          a certain degree of opportunism among those banks still in the market.

Where there is limited liquidity for deals, banks prefer mini-perms given the short term over which they can amortise their arrangement fees. In addition there are fewer active lending banks in the post GFC world (i.e. less competition), hence there where a process isn’t competitive or there is limited appetite banks can dictate there terms.

 

Types of mini perms

There are typically two types of mini-perms a hard mini-perm and a soft mini-perm. We will look at each in turn.

Hard Mini-Perm
A hard mini-perm is a short term loan that mimics a longer term amortisation profile, but with a bullet repayment at the end of the tenor. Legal maturity of this instrument is typically around 5-7 years, forcing the borrower to refinance before maturity or face default. The main disadvantage is the default and refinancing risk for all stakeholders (funders, borrower and Government), which in a PFI deal may mean the termination of the Concession.

Soft Mini-Perm
A soft mini-perm is a long term loan with a mechanism to incentivise the borrower to refinance after an initial short period usually 5-7 years. Two methods for incentivising the borrower include:

1)      ratcheting up margins post the initial period; and

2)      using a cash sweep post the initial tenor

A soft mini-perm is a structure without the default risk of a hard mini-perm, where the loan maturity remains long-term. The soft mini-perm has been used in UK PFI and continues to be promoted by banks on a number of projects.

  Mini-Perm Financial Modelling

Let’s look at some examples of mini-perms assuming the following inputs. You can follow along by downloading the spreadsheets and youtube video. Also note that this analysis assumes that there are no refinancing fees etc.
For all scenario below we use LIBOR of 400bps, and an ongoing CFADS of 1,300 per month.
Hard mini-perm: 5 year initial tenor, bullet at maturity, amortisation profile mimics 20 year tenor, margins 250bps and a credit foncier repayment profile. Note that a credit foncier repayment profile is like a home loan mortgage with fixed instalments. See our tutorial, CFADS and DSCR sculpting, which goes into the credit foncier repayment profile in depth.

Using the actual margins for the hard mini-perm we get the following.

 

As mentioned the hard mini-perm is only short term debt and hence has no margins post the initial tenor. Borrowers usually have to estimate the margins post this short term debt tenor. Note that given the short legal tenor of the facility, the borrower must refinance the loan at the end of the initial tenor.

If the borrowers were to assume that the margins continue at 250bps we would get a normal credit foncier profile as per the below. Given the constant CFADS we would get a DSCR that is constant.

 

Soft mini-perm: 20 years, margins 250bps then ratcheting up to 500bps post 5 years

As you can see in the below the rachet up in margins after the initial tenor of 5 years causes the debt service to increase in mid 2016. With a constant CFADS this margin rachet would decrease the DSCR and eat into potential equity distributions.

 

Given the high debt service post margin rachet (and the likelihood of these rates occurring) borrowers usually assume different margins post the margin rachet. If we assume that the margins continued at 250bps then we would have the exact same profile as in the hard mini-perm assumed rates case.

 

As you can see from the above although the dynamics of soft and hard mini-perms are quite different it could be that borrowers could assume the same financial forecasts, particularly with respect to debt service modelling. One should note however, that the hard mini-perm is inherently more risky given the refinance/default risk. Now let’s look at a number of issues which occur with both hard and soft mini-perms.

Issues with mini-perm structures
 
There are a number of issues which borrowers face with mini-perm structures. These include:

i)                 Hedging: do you put a short term swap in or long term swap? Short term swaps will face refinancing risk on the underlying rate, usually LIBOR. Long term swaps assume a certain repayment profile which may change over time;

ii)                Affordability: what assumptions do the stakeholder (predominantly the borrower and the Concession grantor) make about margins, underlying interest rates, tenor and amortisation profile;

iii)               Sharing of risks: who takes the risk on margins, underlying interest rates, tenor and amortisation profile?

The above issues are resolved on a project by project basis.

Why you don't have to be a VBA macro master to build a financial model - Part 2

 

In part 2 of our “Why you don’t need to be a macro master to build a Financial Model” we are going to look at the main types of macros you’ll need to produce an advanced financial model. The three types of macros we are going to look at are:

 

1)      A goal seek macro – can be used to break a circularity

2)      A single cell copy and paste macro – we covered this in part 1 of this series

3)      A multiple cell copy and paste macro

Goal Seek Macro

Ok, this is probably the easiest macro to implement. It i

s very similar to the single cell copy and paste macro. If you are not aware of what a goal seek is we will try and sum it up in a line or two.

A goal seek will try and solve a certain cell to a specified value by changing another. If you look at the below figure we have 50 sales, each with a profit margin of $3.5/unit giving a total profit of $175. We want to know what the profit margin would have to be to get a total profit of $200. Obviously the profit margin has to be $4 per unit. But look how we found it. We goal seeked it by setting the total profit cell to 200 by changing the profit margin per unit.  

 

Ok, now let’s cheat by going back to our spreadsheet in part 1. As per part 1 we are going to record a macro. Go to View, Macros, Record Macro. Let’s call the macro GoalSeek. Go to the DebtCheck value and select Data, What-if Analysis and then Goal Seek. We want to select to value 0, by changing cell DebtHard value as per the below figure. 

  

Stop the recording by pressing the stop button in the bottom left hand corner.

Now let’s edit the macro. Go to View then Macros, View Macros. Select the GoalSeek macro and press edit.

We are going to delete the Range("D13").Select at the top. And we are going to replace the cells with their actual names as per below.

 

Now go back to the spreadsheet. Put 12,500 into the DebtHard cell (G12). Go to Data, Macro and View Macro. Select GoalSeek and press Run. This should solve the macro and set the DebtCheck to 0.  

Single Cell Copy and Paste Macro

Now we looked at a single cell copy and paste macro in the first part of this series so we are not going to cover it here. If you want to check out that article, click here. 

Multiple Cell Copy and Paste Macro

Ok, we’re going to leave you to do a bit of homework on this one. Depending on how you go we might look at doing a third part to this course. Go to the spreadsheet and scroll down to question two.  See how you go with it. If you’d like us to do a third part to this macros series, leave us a comment or send us an email. Hint: In this question you might find that the countif function will come in handy.

We cover macros in detail in our advanced toll road training course. Click here to check it out.

 

 

 

 

Why you don't need to be a macro master to build a financial model - Part 1

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Many self-proclaimed financial modeling experts will tell you that you need to have a good grasp of Visual Basic for Applications (VBA) and macros. Well at Video Financial Modelling we are here to tell you that you don’t. Well not if you’ve read this article.

Resources

YouTube Video

Starter Spreadsheet

Final Spreadsheet

Why do we need macros?

In simplistic terms a macro is a program that implements a task. VBA macros are often used to automate tedious financial modeling tasks or to break circularities.

Why don’t you need to be a macro master?

Well there are a number of reasons why you don’t need to be a VBA macro master.

1)      Firstly, we’re going to give you some common macros that you can simply copy and paste into VBA in your financial model

2)      Secondly, it is really easy to record your own macros and then manipulate them to suit your particular situation. We’ll look at an example a bit later

3)      Thirdly and finally in all the financial models we have seen (and we’ve seen a lot) there are only a few situations that require a macro. We will run through each below.

Firstly let’s look at an example on how to record a macro.

Example – Manually recording a macro and then manipulating it

In this example we are going to look at Firstly open the accompanying blog workbook. Also remember you can watch the blog youtube video to follow this example.

To start recording a macro, press View on the menu and then select Macros. Select Record Macro on the popdown menu. Let’s call the macro DebtSolve.

Select the Debt Amount – Calculated value and then copy the cell (CTRL+c) and paste special values (Home, Paste, Values) in the Debt Amount – Hardcoded cell. Press enter.

 

 

Now press the stop button in the bottom left hand corner.

 

 

Go to Data, Macro and push View Macro. Then select the DebtSolve macro and press edit. We are now going to put the named cells into the macro and add in a loop.

Ok, let’s firstly put the relevant named ranges in. Just copy both the DebtCalc and DebtHard and put them in place of the relevant cells in the VBA file.

Now let’s add the loop.

Simply copy and paste the following code:

Do While Range("DebtCheck") <> 0.

We’ll also have to put in:

Range(“DebtCalc”) to replace the Selection before copy.

Place it at the start of the code after the Sub Debt Solve() and the green commentary.

And now put a Loop before the End Sub. The final macro should look something like this.

This loop will keep copying and pasting the calculated debt amount into the hardcoded debt amount, until these values converge and the debt check becomes zero.

Now let’s go and select Insert on the menu, select Shape and then a rectangle. Draw it on the sheet. Then right click on the rectangle and select Assign Macro and press DebtSolve.

Now press the button you just created and voila you’ve created a macro that solves a common financial modeling circularity. Change the hardcoded value or the arrangement fee and press the button again. It should solve.

In the next part to this macro series we are going to look at the main types of macros you’re going to need when you’re financial modeling. 

 

 

  

 

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.