Financial Modeling

Financial Modeling

Topics We Will Cover:

Budgets

To provide a tangible and quantifiable estimate of the receipt and allocation of resources. (A budget is a plan to show how much money a person or organization will earn and how much they will need or be able to spend)

The Master Budget

(The Master Budget forecasts a business’s complete operations over the medium term(1-5 years))

1) The Operating Budget
- Sales and collections Budget
- COGS Budget
- Inventory & Purchases Budget
- Operating Expenses Budget
- Budgeted Statement of Income
2) The Financial Budget
- Capital Budget
- Cash Budget
- Budgeted Balance Sheet

Financial Model

A quantitative representation of a company’s past, present, and future business operations.
- We will focus on:
  - Master Budget
  - Consolidated Financial Statements
  - Free Cash Flow Analysis
  - Sensitivity Analysis
  - Contribution Margin Analysis
  - Financial Ratios Analysis
  - Valuation Analysis
  - Capitalization Chart

Consolidated Financial Statements

Free Cash Flows

Free Cash Flows represent the amount of cash a business generates (or, in some cases, consumes) over a given timeframe after paying all of its required costs for that period. Free Cash Flows represent the cash available to all providers of capital (both debt and equity).

Sensitivity Analysis

Sensitivity analyses are used to model the effect of changing input variables on some output of interest, such as net income or free cash flows. It is often helpful to build a series of sensitivity analyses to get a sense for what input variables will have a significant influence on your output metric of interest.

Contribution Margin Analysis

Contribution Margin is defined as the extent to which each unit sale contributes to a business’s fixed cost base. This is calculated as unit price – variable costs per unit. CM examines key operating metrics, such as operating leverage (calculated as fixed costs/total costs), breakeven value in units (how many units must be sold before the business reaches “breakeven,” or the point at which revenues cover all costs), and breakeven value in dollars (the level of sales, as measured in dollars, at which the business reaches breakeven).

Financial Ratios Analysis

Financial ratios, such as gross margin (gross profit/sales, net profit margin (net income/sales), and ROE (net income/owner’s equity), among others, are often used to analyze financial models.

Valuation

Business Valuation is the process of determining how much a company is worth.

Capitalization Chart