Financial Modelling Basics

Challenge – Build Your Own Model

Overview – What We’ve Learned
• Define the key ratios
• Start with the Input sheet, based on the ratios
• Use clear, consistent formatting that is easy to read
• Next build the calculation sheet
• Finally create the output sheet – profit and loss, graphs, sensitivity
table
Challenge
• Riddle Denim has two areas – Northern area and Southern area
• 3 product categories – Mens, Ladies and Kids
• Product sales last year $5m Northern area; split Mens 40%, Ladies 50%, Kids 10%.
• Product sales last year $7m Southern area; split Mens 30%, Ladies 55%, Kids 15%.
• Sales growth of 10% expected in year 1 & 2 and 8% in year 3 in Northern region;
Southern expected to be 12%/11%/10%
• Gross profit margins : Mens 40%, Ladies 60% and Kids 30%
• No sales commission paid
• Royalty of 5% of sales paid on all products
• Distribution company has quoted a rate of 5% of sales in Northern region, but 7% of
sales in Southern region due to longer distances.
Challenge
• Payroll costs last year $1m – 60% in North
• North rental, office& utility costs $800k last year, South $1.1m
• Inflation of 1%
• What is the combined operating profit in year 1, year 2 & year 3?
• What is the effect of a 5% change in sales growth (up and down) in
Mens & Ladies wear on year 3 operating profit?
Challenge - Questions
• What is the combined operating profit in year 1, year 2 & year 3?
• What is the effect of a 5% change (up and down) in Ladies wear on
year 3 operating profit?