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Financial Statement Modeling

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Page 1: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

FinancialStatementModeling

Page 2: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

What is a financial statement model (FSM)?

• Historical results and forecasts

• Income statement

• Balance sheet

• Cash flow statement

Income statement

Balance sheet

Cash flow statement

Page 3: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Financial Statement

Model

DCF Model

Comps

Model

M&A Model

LBO Model

FSM is a foundational model for common models

Page 4: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Financial Modeling

Company

knowledge

Attention

to detail

Reading

financial

reports

AccountingCorporate

finance

Excel

Industry knowledge

Effective modeling requires a combination of skills

Page 5: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Formatting

• As important as the substance of your model

• An unformatted model is difficult to understand

• Always assume the model will be sent to a client

Model Formatting

Model Substance

Page 6: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Color coding

• Maintain consistent color conventions

• Boost helps: Auto-color (ctrl alt a)

Page 7: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Custom formatting

• Format Cells > Number > Custom

• Multiples (i.e.8.5x)

• Row headers (use “”)

• Switches

• Positive; Negative; Zero

Page 8: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Formatting

• Maintain standard formatting

• Number formats

• Column / row

headers & spacing

Page 9: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Grouping vs. hiding data

• Avoid hiding rows; Grouping is preferable (shift alt /

shift alt )

Page 10: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Don’t daisy chain (links to links…)

• More difficult to audit this and get to the end result

• Exceptions for straight lining data across forecast periods

Page 11: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Financial modeling conventions on Wall Street

Many shorter worksheets

Fewer longer worksheets

Page 12: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Equity research reports

• Used widely in IB and asset management; available via

Thomson, FactSet, and CIQ

Page 13: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Gathering the appropriate documents

• The junior analyst gathers all

the appropriate documents

into a coil-bound manual

(often called a ‘PIB’ – public

information book) and

gives copies to the team

Page 14: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Intangible assets

Page 15: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Purchases of intangible assets

• The value of intangible assets can only increase via

purchases, not write-ups

• Forecasting / modeling best practices

• Assume purchases in line with historical trends (% of

sales or straight-line)

• If historical trends are lumpy, assume no new purchases

Page 16: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

Property, plant & equipment (PP&E)

Page 17: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

PIK interest

• Some loans enable borrowers to defer paying a portion /

or all of the interest, by adding it to the principal

• Interest expense still appears on the IS

• Example: A 3 year, $1,000 loan @ 10% PIK:

Page 18: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

The revolving credit facility (revolver)

• When there is a surplus, revolver can be paid down…

$0.0

+

-

Page 19: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

The revolving credit facility (revolver)

• If revolver is fully paid down and there remains excess

surplus, additional surplus grows the cash balance:+

Page 20: Financial Statement Modeling · PDF fileWhat is a financial statement model (FSM)? •Historical results and forecasts •Income statement •Balance sheet •Cash flow statement Income

The revolving credit facility (revolver)

• When there is a deficit, must borrow from revolver:

$0.0

+

-