Corporate Bridge Financial Modeling eBook - Part 4

8/11/2019 Corporate Bridge Financial Modeling eBook - Part 4

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Debt and Interest - Schedule

Calculate Cash Flow Available for Debt Repayment

Reference in past information on Long Term Debt

Make sure to enter the mandatory Long Term Repayments (refer to repayment schedule provided inthe Annual Report in the discussion on Debt Section)

Calculate forecasted Long Term Debt Repayments

Calculate Cash Flow Available for Revolver

Revolver = Cash Sweep

Calculate Interest Expense/ Income Refer to average debt balances

Revolver interest expenses

Long Term interest expenses

Cash Balance for Interest/ Income

Link Up

Forecasted interest expense/ income to Income Statement

Forecasted debt repayments/ borrowings to Cash Flow Statement

Forecast debt balances to the Balance Sheet

Private and Confidential Not for Circulation 2


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Debt and Interest Schedule - Sample


Set up a Debt Schedule

Reference the Cash Flow Available for Financing

Reference all equity sources and uses of cash

Referenced


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Calculate Cash Flow from Debt Repayment

Reference the Beginning Cash Balance from the BalanceSheet

Deduct a minimum cash balance

Skip Long Term Debt Issuance/ Repayments, Cashavailable for Revolving Credit Facility

and Revolver section for now

Assumption

Calculations

Reference


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Reference the historical long term debt balances from the Balance Sheet

Reference


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Input the future debt repayments fill in the known aggregate maturitiesof long term debt

INPUTS from known debt maturities


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Forecast future debt balances

Reference beginning balance

Calculate forecast ending balance

References

Calculations


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Reference Long Term Debt Issuance and Long Term Debt (Repayments)

Calculate Cash Available for Revolving Credit Facility

References & Calculations


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Reference the past revolving credit facility balances from the BalanceSheet

References


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Set up the logic for the revolver the cash sweep must be able to:

Borrow if a cash flow deficit

Pay down itself with free cash flow

Stop at a zero balance

References

Cash Sweep

(use MIN logic)

Calculations


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Calculate interest expense from Revolver

Calculate the average balance

Make a reasonable assumption for an interest rate

Forecast interest expense

Calculations

Assumption


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Calculate interest expense from the Long Term Debt



Forecast the interest expense

Calculate Total Interest Expense

Calculations

Assumption


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Calculate interest income from Cash Balances



Forecast the interest income

CalculationsAssumption


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Link up interest expense and interest income to Income Statement

References


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Link up debt repayments and borrowings to Cash Flow Statement

References


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Link the debt balances to Balance Sheet

Review final logic for totals and other statistics

ReferencesCalculations


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Illustrative Flow of Funds


Debt & Interest Schedule

Income

Statement

Cash Flow

Statement

BalanceSheet

WorkingCapital

Sales

COGS

Change in WC

Working Capital

PP & E,

Depreciation

Depreciation

Intangibles,

Amortization

Amortization

Intangibles

Amortization

Other LongTerm Items

ShareholdersEquity

Other Long

Term Items


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Trouble Shooting Your Model


Circular References

Understanding what it means?

Designing a solution for fixing circular references

Balancing the financial model

Error handling and tracing the logic of the model

Final Touches

Validate assumptions

Ensure formulae are in place

Make sure formatting is as desired


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Dealing with Circular Models



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What is Circular Reference


Free Cash Flow

Interest Expense

&

Interest Income

Revolver Balance

& Cash BalanceNet Income


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Embedded Errors


#Value a cell reference to a letter rather than a number

#Ref reference to a cell that no longer exists

#DIV division by Zero or a Blank Cell

#Namereference to a name that does not exist


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Breaking the Circular Reference


Common for fixing most models referred to as Jump Starting the Model

First identify the source of the error

Then stop the error from flowing through the Income Statement

Free Cash Flow

Interest Expense

&

Interest Income

Revolver Balance



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How to Jump Start


Copy interest expense/ income formulae on the Income Statement

Paste the formulae off to the right, beyond the last column on the worksheet

Delete the original interest expense/ income formulae andhard code using Zeros, therebybreaking the Circular Reference

Copy interest expense/ income formulae back into the Income Statement

For Jump Starting

For Jump Starting


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Breaking the Circular Reference


A more sophisticated approach

Excellent for finding your errors

Solved the problem of embedded errors

Uses IF statement logic* to turn on and off circularity

Then stop the error from flowing through the Income Statement

* =IF(logicaltest, value if true, value if false)

Free Cash Flow

Interest Expense

&

Interest Income

Revolver Balance



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Busting the Circular Reference


Name a cell Circular (Ctrl+F3, Alt IND)

Input aZero in the cell name Circularto turn off circular reference

Adjust interest expense/ income on Income Statement Add IF(Circular =0,0to the existing formula

Free Cash Flow

Interest Expense

&

Interest Income

Revolver Balance



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Busting the Circular Reference


Adjust Net Change in Cash on the Cash Flow

AddIF(Circular=0,0 to the existing formula

Free Cash Flow

Interest Expense

&

Interest Income

Revolver Balance


Other common areas where the Circular

Buster is added to break circular logic

include:

- Debt Schedule

- Equity Schedule

- Tax Schedule


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Error Finding with Circular Buster


Input Circular = 0 (Zero) this switches off Circular Reference

Go through the Income statement and then the Balance Sheet

Look out for errors ONLY in line items as ratios are derived

Trace the first errors precedents (Short Cuts: Ctrl+[OR Alt T U T )

Fix the first error

Repeat the process to locate more errors (Note, solve each error as you encounter them)

Input Circular = 1 this switches On Circular Reference


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Balancing the Model


Safety Check on the model


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Balancing the Model


Reconcile the change in each Balance Sheet line item with Flow of Funds on the

Cash Flow

Ending Balance on

Balance Sheet

Year 0

Ending Balance on

Balance Sheet

Year 1

Cash Flow

Year 1=

Cash Flow

Year 0 Year 1 Difference Year 1

Cash 28.6 25.0 (3.6) (3.6) Accounts Recievable, net 473.0 505.7 (32.7) (32.7)

Inventory 383.8 411.4 (27.7) (27.7)

Other Current Assets 83.5 92.3 (8.8) (8.8)

PP & E, net 965.6 1017.8 (52.2) (52.2)

Goodwill 424.3 454.3 (30.0) (30.0)

Deferred Income Taxes 120.3 120.3 0.0 0.0

Other Long Term Assets 108.6 108.6 0.0 0.0

Balance Sheet


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Balancing the Model Quick Checks


Quick sanity checks on Balance Sheet and Cash Flow

Wrong signs Capex on Cash Flow Statement, etc.

Unreasonable changes on the Balance Sheet

Divide error by 2

Usual to find out a sign error

Manual Checking

Print the model and check manually sometimes this helps!

Hunt the screen

Check if all the Schedules are linked properly to the key statements

Check formulae for Totals and others

Common Errors & Solutions

Error Possible Resons

Unstable Balances Reference to an incorrect yearOff by a small amount Check past information

Off by a constant amount Check for error in the first year out of pa

Off by a constant growing amount Possible omissions


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Is this model ready?



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Testing your Model


Is a Balanced Model a Correct Model?

Balanced Model Correct Model

Review your model by each line:

Are the assumptions reasonable & defensible?

Is everything properly formatted?

Have footnotes been provided where necessary?

Manually check all calculations if something looks wrong/ or in doubt

Remember that you would be responsible for each assumption and number in the model


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The Final Check


Check if the model is

Balanced?

Has correct references

OK with the manual checks

Assumptions behind the number are defensible

Story behind the numbers is clearly conveyed

File location is easy to access for all authorized people (check with internal file saving norms)

Time and date stamp the model


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Caveats


Issue of timing

Annual model ignores seasonality and assumes even cash flows throughout the year

Check the applicability of Quarterly, monthly or weekly models depending on requirements

Simple One Line revenue income statement

Over-simplified credit statistics

Purpose is DCF or Merger and NOT a debt offering


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Model Layout


Single Sheet - Vertical

Compact (eg; Merger Model)

Easy alignment of columns & headings

Tougher to navigate

Multiple Sheets - Horizontal

Readability is high (name individual tabs)

Easier to set up (standalone model, IPO)

Numerous Sheets

The choice of model has to be purpose driven


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Tweaking the Assumptions


Assumptions & Inputs

Are they reasonable?

Are they defensible?

Making notes of sources is always helpful

Reality Check

Match research or EPS expectations

5 year EPS CAGR

Incremental Impacts

Scenarios & Cases

Upside, management and base cases

Prepare detailed Revenue build-up

EPS growth rate adjustments

Check which variables can be adjusted to raise EPS growth rate over the forecast period

Start with top of the income statement line items and move down

Stress test the Share repurchase plans

Check the maximum number of shares that can be repurchased

Check for constraints:

No material borrowings on revolver

No material build up of excess cash


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Identifying the Key Drivers


Identify and isolate the drivers

Always remember to footnote and source as required

Forecasting requires Excel mechanics along with Accounting knowledge


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Are all models standardized?


One size does not fit all

Be sensitive to the Business model when modifying a Financial model

Study the new companys financial performance

Identify the line items (may be different from the existing model)

Design the flow of funds to suit the business (reference new line items to and from the core statements)

Do not delete anything in haste

Always trace precedents to check linkages (Alt T U D)

Data -> Group Rows -> Hide Detail (Alt D G, H)


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Corporate Bridge Financial Modeling eBook - Part 4

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