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Projecting Cash Flow

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we provide an in-depth guide to projecting cash flow.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. The first line is some form of income, either Net or Operating Income, depending on the business.. Adjustments are made on the operating, investing and financing cash flows.
  2. Operating Cash Flow: The change in Accounts Receivable (A/R) in the Balance Sheet (B/S) needs to be reflected in the cash flow statement. If A/R decreases on the B/S, it means we have collected more from customers and therefore the amount is added to the Cash Flow statement. 
  3. A decline in inventory on the B/S means more cash being received and needs to be added to cash flow statement. An increase in prepaids though, needs to be deducted from the cash flow statement. An increase in payables is treated similarly to the inventory adjustment adjustment. An increase in depreciation should not be reflected in the cash flow statement and is added back.
  4. Investing Activities: Increase in parts inventory is reflected by including the change as a negative on the cash flow statement. The same can be said for Land and Land expenses, in addition to Machinery and Equipment, Transport etc. 
  5. Financing: Any increase in payables means the business held onto cash longer and is therefore added back on the cash flow statement.
  6. Subtracting these cash adjustments from the beginning cash at the start of the period equals the cash at the end of the period.

I hope that this has been a useful lesson on cash flow projection.

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Balance Sheet Projection

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we explain how you can project the balance sheet.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. Coming soon. 

I hope that this has been a useful lesson on balance sheet projection.

Your friends here at https://investmentcertifications.com

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Income Statement Projection

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we explain how you can project the income statement.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. The layout is important and all information needs to be clear, concise and transparent. All key points needs to be highlighted and tracked throughout the spreadsheet. Separate the data into different tabs and ensure a summary tab is presented upfront.
  2. Price x Quantity gives total revenue, whilst cost of goods sold, gross margins and net margins are also projected to provide net income. Each assumption should contain a note outlining the reasons for each assumption.
  3. Whilst it is normally total sales – cost of goods sold that provides gross income, for the purpose of projections, it is slightly different. Instead, we determine what we expect the gross margin will be going forward, taking historical figures into consideration, and then apply these margins to the revenue figure we have projected. This margin provides the Gross Income figure. Total Sales – Gross Income provides the Cost of Goods Sold figure for our projections.
  4. With regards to calculating the Operating expenses etc, we do something similar. Project the net income margin, taking into consideration historical figures and the outlook for the company/sector. Apply this margin to revenue to produce the Net Income figure. Now, Gross Income – Net Income = Operating expenses.
  5. Once the assumptions are made and projected, the previous year figures should be presented agains the projected figures to highlight the differences.

 

I hope that this has been a useful lesson on income statement projection.

Your friends here at https://investmentcertifications.com

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Cash Flow Statement Model

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we provide a detailed look at cash flow statements.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. Cash flow statement typically has 3 categories; operating activities, investing activities and financing activities.
  2. The first line item in the cash-flow statement is Net Income, which is the last line item in the Income Statement. In essence, you are trying to determine how much of the net income was a cash expense and how much was a non-cash expense that can be added back. A healthy company will have growing cash flow.
  3. Depreciation and amortisation  are non-cash expenses and are therefore added back to net income. Compensation as  a result of an acquisition, in the form of stock for instance, is similarly not a cash expense and is added back. The difference between the actual and provision for doubtful accounts or inventory is added back or subtracted depending on the outcome. R&D and net gains/losses on investments needs to be considered and added/subtracted. All of the above are related to the Income Statement and expenses.
  4. The following are in reference to the Balance Sheet (B/S). If Accounts Receivable decreased on the B/S, that means more people paid and we therefore add this difference as additional cash-flow. Inventory, pre-paid expenses, lease receivables, accounts payable, income taxes payable, accrued compensation and deferred revenue are further line items in the Cash flow Statement. 
  5. Adding the line items from points 3 and 4 above, provides the company with their Net Cash provided by Operating activities.
  6. Companies also invest their cash proceeds, with some being more aggressive than others. Some of this might be expiring which results in proceeds added back to the cash-flow statement. There are also investments into the business such as on property, plant and equipment or on mergers and acquisitions. When all of these are added, it provides the company with their Net Cash provided by Investing activities.
  7. A company may issue common stock or repurchase common stock, which needs to be accounted for in the cash-flow statement. Any changes in long-term debt or other financing activities also needs to be dealt with. Adding these up provides the company with their Net Cash provided by Financing activities.
  8. Adding all of these changes and then taking account of the beginning cash balance provides the cash and cash equivalents figure.

I hope that this has given you a better understanding of cash flow statements.

Your friends here at https://investmentcertifications.com

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Financial Balance Sheets

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we cover the balance sheet by walking through an example step-by-step.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. If all the assets in a company were liquidated and the proceeds used to pay off all of the liabilities, what is left is the equity proceeds. Therefore, Assets = Liabilities + Equity.
  2. Current Assets are short term assets with the first line item being cash and cash equivalents with Investments coming after this on Ciscos Balance Sheet. Accounts receivable refers to the money owed to Cisco. Inventory is the equipment of the company. Deferred tax assets are essentially a tax credit that come in as an asset. Other current assets vary from company to company and for Cisco, they can be found in the footnotes of annual/interim reports.
  3. Long-term Assets include Property and Equipment Net. The “net” means that depreciation has been accounted for. Goodwill in todays M&A structures are not treated in similar fashion today as they were previously, whereby the goodwill could be treated as an expense on the Balance Sheet and therefore a tax benefit was recognised. Intangible Assets vary but in Ciscos case could be the brand for instance. Adding the Current and other Non-Current Assets gives the Total Assets.
  4. Current Liabilities are short term and includes short-term debt, which is money that generally needs to be paid out within 3 months of being borrowed. The Payables figure is the amount owed to suppliers. Income taxes payable is the figured owed to the government in the way of taxes. Accrued compensation is a liability in that it will at some stage need to be paid out to employees for leave etc. Deferred revenue refers to money received but for which the service has not delivered/provided. Adding the line items, you get the Total Liabilities figure.
  5. Non current liabilities are longer term, as is evident in the first line item, long-term debt. Adding up the non-current and current liabilities gives the Total Liabilities figure.
  6. Once the Total Equity figure is now included, we should be in a position to surmise that the Total Assets figure equals the Total Liabilities + Equity figure.
  7. Total Current Assets – Total Current Liabilities = Working Capital, which is a measure that tells you how much the company has to cover its working capital needs (i.e. the day-to-day needs of the business).

I hope that this was a practical tutorial of financial balance sheets.

Your friends here at https://investmentcertifications.com

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Financial Income Statement Sample

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we cover the basics of the financial income statement using a sample from Cisco Systems.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. Using Cisco as an example, Net Sales (Revenue) is an accumulation of Product and Services sales.
  2. Cost of Sales is divided as per individual categories for Cisco, such as cost of software, manufacturing etc. Revenue/Cost of Sales for Cisco is approximately 3:1, similar to the Revenue/Cost of Services.
  3. Subtracting the Total Cost of Sales from the Total Sales gives you the Gross Profit (Cisco refers to this Gross Profit as Gross Margin).
  4. The Gross Profit is further broken down as a % of Revenue, Products and Services.
  5. Operating Expenses for Cisco include research and development, sales and marketing, general and administrative (G&A), amortisation and in-process research and development.
  6. Subtracting the Total Operating Expenses from the Gross Margin, gives the Total Operating Income. By further dividing this figure into Revenue, we get the Operating Margin.
  7. There will be a line item for interest arising from the company taking on debt. Other operating income might refer to a strategic positioning for potential M&A targets or other strategic options.
  8. Net income is reached once taxes are accounted for and subtracted. Net Income divided by the total number of shares outstanding gives the Net Income per share, more commonly known as the Earnings per share (EPS).
  9. It is advisable to use the diluted, rather than basic number of shares outstanding as this takes into account things like options, which at this point might have been granted and are likely to be exercised.

I hope that this step-by-step tutorial of the financial income statement was useful to you.

Your friends here at https://investmentcertifications.com

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Financial Modeling Using Excel

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, we will go through the basics of using Excel to construct financial models.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. Coming soon. 

I hope that this video has effectively demonstrated how you can construct a financial model from scratch using Excel.

Your friends here at https://investmentcertifications.com

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Financial Model Errors

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, you will see some common financial model errors and learn how to avoid them.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. One of the most common types of error is related to data entry, even for those who are being very careful. Therefore, embedding formulas within the excel model is important, rather than relying on manual calculations.
  2. Ensure to watch out for errors in parenthesis and always check to see the value calculated appears reasonable. If you can, check your formula against simple math. Some of excels financial formulas are also a little tricky so if you don’t know exactly what you are doing, use the excel help function.
  3. Break long formulas into simple steps and add or multiply those formula segments. in these formulas, double-check that your formula refers to the right cells. Finally, know which formula to use and what parameters to specify (i.e. NPV or XNPV, SUM or SUMPRODUCT or SUMIF etc.)
  4. By selecting a cell and clicking F2, it highlights the cell references in your formula in different, easy to see colours. This is particularly useful when working on a new version of a model where changes have been made (i.e. adding or deleting rows and columns). be very patient with these changes.
  5. Excel allows you to name and define ranges, which can really help make formulas easy to develop. The main gains from adopting this is the efficiency, transparency and simplicity of the resulting excel model. To name a cell, simply click on it and type the name you want above.
  6. When in doubt, use the excel help feature. Type your query in the top right of your excel window. If you cant find the answer you are looking for, simply type the query into Google where an answer should be provided.

Be sure to avoid these financial model errors in order to construct better, more accurate financial models.

Your friends here at https://investmentcertifications.com

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Financial Model Setup

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.   In the following video, you will learn how to set up a financial model.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. To become a good modeller, you need to understand finance and excel in particular, in addition to being a good listener and good communicator. Math is also an important element and each modeller must bring this together in an elegant, comprehensive, robust and east to use manner. In addition, transparency and flexibility are critical characteristics of the model.
  2. Model stakeholders expect the model to take their thoughts and translate them into a functioning model, whilst they may also expect you to add way too many bells and whistles, graphs etc. 
  3. Model users will do unexpected things with your model so ensure you can track any changes and there is a backup saved somewhere.
  4. Things to keep in mind with the model; what is the problem that the model seeks to assist with?; ask questions in order to understand the scope and set expectations correctly; asses the level of detail expected of your model; thoroughly understand the business and all variables and parameters that impact it.
  5. It is important to know the users of the model. If it is a startup firm, you might have free reign to create a new model but if there is an existing structure in place, you will need to perhaps compromise on certain aspects in order to satisfy all tastes and requirements. Make the model more detailed/simplistic depending on the audience. Typically sticking to the industry norm is advisable. Excels “protect” feature disallows changes in certain cells and should be used.
  6. Before building the model, spend some time on Global Settings, such as font, font size, number format, decimal places etc. Use a similar scheme for your text and your number values. Consistency in appearance is important in the model. 
  7. There should only be one cell for one input variable and avoid hardcoding numbers in your formulas. Finally, do not overly use hidden or grouped columns or rows and let users see the formulas you’ve used.

Learning how to effectively set up a model is important, I hope that this video has helped you master this skill.

Your friends here at https://investmentcertifications.com

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Discounted Cash Flow Valuations

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program.  There are many ways to value a company, each with its own merit and discounted cash flow valuation is one such method.  In the following video, you see how to conduct a discounted cash flow valuation.


Video Transcript/Summary: The strategies and tips provided within this video module include:

  1. Discounted Cash Flow (DCF) is one valuation method which discounts the expected future cash flows. DCF works of the concept; what will someone pay today for a future set of cashflows. A discount factor needs to be used to factor in risks. The present value of future cash flows is known as Enterprise Value.
  2. Step 1 – Estimate EBIT, calculate taxes due and subtract taxes from EBIT, add back depreciation and amortisation and subtract routine maintenance capital expenses to determine the Free Cash Flow figure for each period, which is the figure you will use for discounting.
  3. Models typically project out to 5 years. In order to  project further out, a terminal value needs to be calculated. One approach might be to discount the 5th year FCF projection to eternity. Alternatively, an exit multiple based on comparable can be used.
  4. Now the FCF and terminal values need to be discounted back to present values. This discounted figure is the Weighted Average Cost of Capital (WACC), which is based on the equity and debt of the company being valued. 
  5. Cost of Equity (Re) = Risk-free rate (Rf) + (Beta * Risk Premium). Rf is typically what you can get from a 10 year treasury, Beta measures the risk of a company relative to the broader market and Risk premium is company specific and includes factors such as revenue, liquidity, etc.
  6. Cost of debt (Rd) = Weighted average interest rate on borrowings. Equity % =  equity Capital / Total Capital and similarly, Debt % = Debt Capital / Total Capital.
  7. Projected cash flows are at the end of the year but realistically, the business generates cash flow throughout the year. Therefore, modellers generally prefer to use Mid-Period discounting but this is not the case without the terminal value calculation, just the individual cash flow projections. Once these are all added up, the Enterprise Value (EV) is reached.
  8. EV + Cash – Debt = Equity Value, where Equity Value is a proxy for the market capitalisation of the company. Equity Value / Total Shares Outstanding = DCF price per share.

Learning a variety of valuation methods is essential to succeeding as a financial professional.  Discounted cash flow valuation is a useful way to ascertain the value of a company.

Your friends here at https://investmentcertifications.com

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