Excel Crash Course

corporatefinanceinstitute.com

Introduction to Financial Modeling

Dr. Ahmet D. ERELÇİN MFIN 803

Outline

Introduction to Financial Modeling

Planning your Model

Principles of Modeling

Dr. Ahmet Erelçin Intro to FM 2

Outline

Introduction to Financial Modeling

Planning your Model

Principles of Modeling

Dr. Ahmet Erelçin Intro to FM 3

 What is a Financial Model (FM)?
Excel Crash Course Simply a tool that is built in Excel
to forecast a business’ financial
performance into the future.

Source: Excel Crash Course Presentation, Corporate Finance Institute

Dr. Ahmet Erelçin
corporatefinanceinstitute.com Intro to FM 4
What is a FM?

Assumptions
Historical
about
Performance
Future

Three Statement Model

Income Balance Cash-Flow Supporting

Statement Sheet Statement Schedules
üDepreciation
üWorking Capital
üFinancing
üCAPEX

Dr. Ahmet Erelçin Intro to FM 5

s are built such as discounted cash ow DCF models, merger
s, leveraged buyout LBO models, and various other types of
al models.
What is a FM?

The linked in
statements are the
basis for all other
models

of modeling
Source: 3 Statement Model – Income Statement, Balance Sheet, Cash, Flow, Corporate Finance Institute
Dr. Ahmet Erelçin Intro to FM 6
Types of FMs

DCF M&A IPO LBO

Model Model Model Model

Option Forecasting FP&A (Budget) Sum of the Parts

Model Model Model Model

Dr. Ahmet Erelçin Intro to FM 7

Who builds
FMs?

Source: Overview of Financial Modeling, Corporate Finance Institute

Dr. Ahmet Erelçin Intro to FM 8
 
Costs a Fortune to Learn

Dr. Ahmet Erelçin Intro to FM 9

Outline

Introduction to Financial Modeling

Planning your Model

Principles of Modeling

Dr. Ahmet Erelçin Intro to FM 10

Structuring your Model

Could you build your

house without any
pre-planning?

Likewise, plan your

model in advance

Dr. Ahmet Erelçin Intro to FM 11

Operating expenses as a % of net sales improved gradually b
and 1H11 due to their semi-fixed nature and significant rise i

Granularity
Operating expenses
• Due to the expansion in number of stores, sha
TL k FY08 FY09 FY10 1H11
operation expenses increased from 53% in FY0
Store expenses 27,044 57,565 97,999 70,612
to the following pages for details of three main
How detailed a model needs to be
Warehouse expenses 7,577 11,882 15,968 12,415
Office expenses 16,310 20,423 25,316 21,753 warehouse and office expenses) under operati
Total 50,932 89,869 139,283 104,780
• The headquarters moved from Pendik to it‟s cu
Opex with a monthly rent of TL12k as of June 2010.
TL k FY08 FY09 FY10 1H11
• There are no regional offices, and the adminis
Personnel expenses 22,117 35,302 58,066 42,752 areas within the warehouses.
Rent expenses 13,735 28,850 41,709 26,808
Advertising expenses 2,624 3,959 6,170 8,452 • The Company has carried out a TV promotion
Water/electricity/telephone expenses 2,321 5,866 9,850 6,099
Transporting/loading unloading expenses 252 498 591 2,544
of TL2,3m in order to originate brand recognit
Packing/bags 409 1,477 2,505 2,373 information, this was a non-recurring expense
Section 3.3 – Profitability analysis
Municipal taxes - - - 1,950 additional TV campaign was planned for FY12
Fuel trucks 700 1,248 2,638 1,845 planned even on the long run.
Cleaning and repairing
Food&transportation expenses
711
393
1,318
1,187
2,455
1,730 Operating expenses as a % of ne
1,723
1,323
Rent expenses
Motor vehicle rental expenses 682 1,141 1,563 1,085
Vehicle maintenance and gasoline costs
Non-deductible expenses
591
1,195
689
1,115
1,124
970
and 1H11 due to their semi-fixed
1,037
832
FY08 FY09 FY10
Store 10,244 23,738 37,167
Consultancy expenses 763 2,372 1,105 620
Warehouse 2,985 4,762 4,541
Computer service/repairing 115 184 391 471
Office 124 291 160
Bank charges 186 395 745 431
Total 13,352 28,791 41,868
Packing expenses 62 170 287 279
Operating expenses Unreconciled difference 383 58 (159
Trucks maintenance costs 50 149 343 247
Total 13,735 28,850 41,709
Insurance expenses 94 255 321 190
TL k FY08 FY09 FY10 1H11
Stationery costs 142 148 209 161
Store expenses 27,044 57,565 97,999 70,612
Extraordinary costs 63 - - -
Warehouse expenses 7,577 11,882 15,968 12,415
Other expenses 3,726 3,547 6,509 3,557
Office expenses 16,310 20,423 25,316 21,753
Total 50,932 89,869 139,283 104,780
Total 50,932 89,869 139,283 104,780
Pers. exp. as a % of net sales 28.3% 13.5% 10.8% 9.3%
Opex
Rent exp. as a % of net sales 17.6% 11.0% 7.8% 5.8%
Advertising exp. as a % of net sales 3.4% 1.5% 1.2% 1.8%
TL k FY08 FY09 FY10 1H11
Utility exp. as a % of net sales 3.0% 2.2% 1.8% 1.3%
Personnel expenses 22,117 35,302 58,066 42,752
Dr.
OpexAhmet
as a % Erelçin
of net sales 65.1% 34.3% 26.0%
Intro to 22.8%
FM Rent expenses 13,735 28,850 41,70912 26,808
Source: VDR-2.4.1.1.2.2 Advertising expenses 2,624 3,959 6,170 8,452
Flexibility

Will depend upon:

ü How often it will be used,
ü by how many users,
ü for how many different uses

Flexible Templates are preferable over

transaction-specific models.

Dr. Ahmet Erelçin Intro to FM 13

 exi ilit  largel  determine the  tructural requirement  of a model.  tructural requirement  for

Granularity & Flexibility

t  and a limited u er  a e are quite low. Remem er, there i  a trade-o  to  uilding a highl
ou don’t need to  uild in  ell  and whi tle , don’t. A   ou add granularit  and  exi ilit ,
ng  ecome  critical.

The more complex is a model;

• the longer it takes to complete
• the more exposed to errors
• the less transparent it becomes
• The more confusing are business
outcomes

Remember:
Less is more!

e granularit / exi ilit  level  of common inve tment  anking model .

Source: The Ultimate Guide to Financial Modeling, Wall Street Prep
Dr. Ahmet Erelçin Intro to FM 14
Granularity & Flexibility
The ta le  elow  how  the granularit / exi ilit  level  of common inve tment  anking model .

High  exi ilit Low  exi ilit

Leveraged  nance credit model Integrated L O model

Merger model template “one  ize  t Integrated DCF model

High granularit all”
Integrated Merger Model

Integrated operating model

Trading comp  template “ ack of the envelope” accretion/dilution

model
Tran action comp  template

Low granularit DCF “one pager”

L O “one pager”

imple operating model

Financial model pre ent-a ilit

Source: The Ultimate Guide to Financial Modeling, Wall Street Prep
Dr.Regardle  of granularit  and  exi ilit , a  nancial model i
Ahmet Erelçin Intro to FM  a tool de igned to aid deci ion making. Therefore, all m
15
Periodicity

Annual Quarterly Monthly

2017 Q4 2017 Dec 2017

Most of
Equity
the DCF, FP&A
Analyst’s
M&A, LBO Budgets
models
models

• Set up the model with the smallest unit of time desired

• Keep quarterly and annual data in separate worksheets
• If you use Quarterly and Annual data, forecast the Quarterly data
first

Dr. Ahmet Erelçin Intro to FM 16

Modularity

Historical Income
Calculations
Financials Statement
Balance
Sheet
Cash-Flow
Statement
Ratio
Assump Analysis
tions DCF

Inputs Calculations Outputs

No calculations, All calculations are No calculations, only
only data worked in these worksheets for presenting outputs.
Ready for print-outs

Data flows from left to right

Dr. Ahmet Erelçin Intro to FM 17
Inputs – Historical Data

In God we trust, all others bring data... Dr. W. Edwards Demings

Sources of
Historical Financials
Information

Annual Reports

Publicly available data

Stock Exchange/News/Equity
Research/Independent Audit

Shareholders & Investor Presentations Data on Comparable Companies

Management Interviews & Meetings Sales/EV, P/E, EBITDAx

Dr. Ahmet Erelçin Intro to FM 18

Inputs – Assumptions

Solid understanding of the underlying business is a MUST!

Sources of Industry Outlook:

Anticipated Industry Growth
Information Major Opportunities & Risks

Competitive Position:
Pricing Flexibility
Possible Market Share Change
Cost Structure

Expansion Opportunities
New Products/Stores/Format
Development Costs
Economies of Scale

Macroeconomy Reinvestment Needs

Taxation GDP Growth Working Capital
Inflation CAPEX requirement
FX / Interest Rates

Dr. Ahmet Erelçin Intro to FM 19

 Effective forecasting has very little to do
with modeling:
Beware To forecast a company’s revenue, an analyst must
have a solid understanding of company’s business
model, Key customers, Addressable market,
Competitive position, Sales strategy, etc etc.

Garbage in … … Garbage Out

Calculations

Inputs Calculations Outputs

No matter how
sophisticated your
model and
calculations are

Dr. Ahmet Erelçin Intro to FM 20

Do Not Overcomplicate

Analysis is
Paralysis
Do not
overanalyze nor
overcomplicate.

Dr. Ahmet Erelçin Intro to FM 21

Outline

Introduction to Financial Modeling

Planning your Model

Principles of Modeling
Most of the slides in this section are based on:
“The Ultimate Guide to Financial Modeling, Wall Street Prep”

Dr. Ahmet Erelçin Intro to FM 22

 Without color coding, it i  extremel  di cult to vi uall  di tingui h  etween cel
hould not ( i.e. formula ). Well  uilt model  will further di tingui h  etween fo
work ook  a  well a  cell  that link to data  ervice .
To Start With: While di erent inve tment  ank  have di erent hou e  t le ,  lue i  t picall  u
formula . The ta le  elow  how  our recommended color coding  cheme.

T pe of cell xcel formula Color

Color Coding: Hard-coded num er  (input ) =1234 lue

Formula  (calculation ) =A1*A2 lack

Store Link  to other work

₺10,0 ₺10,7 heet ₺11,4 = heet2!A1
₺12,3 ₺13,1 Green
₺14,0
Wareouse ₺150,0 ₺160,5 ₺171,7 ₺183,8 ₺196,6 ₺210,4
HQ Link  to other 
₺100,0 le
₺107,0 ₺114,5 =[ ook2] heet1!$A$1
₺122,5 ₺131,1 Red
₺140,3

Link  to data provider  (i.e. CIQ, Fact et) =CIQ(IQ_TOTAL_R V) Dark Red

Inserting Comments: 2. Warehouse Expenses

While ever one agree  that color coding i
Warehouse Expense per Store Ahmet Erelçin:  ver
₺60,0
 important, keeping up with it ca
₺64,2 ₺68,7 ₺72,8
• Critical for footnoting sources and W/House optimization serves two ends:
format cell   a ed on whether the
Eff Gains on W/H Optimization 1- COGS are input  or formula
0,0%
margin decline 1,0%,  ut it can 
due to decline in 1,5%e done. 
adding clarity to data in a model W/H Exp/Store after Optimization ₺64,2
salvage at the stores ₺68,0
& transportation costs ₺71,7
• Do not trust your memory in a 1,000 (covered in our  xcel Cra h Cour e, which 
2- Cost ou can enroll in here). Alternativel
savings at the warehouse level also ,
row model 3. Advertising Expenses
prevail
1,75% 1,75% 1,75% 1,75%
with a third part   xcel add-in like Maca acu  (which i   undled with Wall  tree
enrollment ), Capital IQ or Fact et. The e tool  allow  ou to “autocolor” an entir

Comment

Dr. Ahmet Erelçin In Intro

erting comment
to FM  ( hortcut  hift F2,  ee our  ential  xcel  hortcut
23  Li t) in
adding clarit  to data in a model.
Numbers
Sign Convention: Profit & Loss Statement
Revenues
2017A
865.712
2018E
1.158.739
2019E
1.887.957
• All incomes positive Growth 33,8% 62,9%

• All expenses negative

Cost of Goods Sold (744.512) (968.590) (1.567.382)
• Subtotal calculations less error-
prone Gross Profit 121.200 190.149 320.575
• Can use =SUM (..) function Gross Margin % 14,0% 16,4% 17,0%

without hesitation Operating Expenses (195.651) (230.080) (317.675)

EBITDA (74.451) (39.931) 2.900

2018E 2019E
Number Formatting: Revenues 1.077.134 1077134163
Avoid unnecessary details:
• Please, no decimals!! Especially Cost of Goods Sold (902.800) -902799998,3
on the Output pages Gross Profit 174.334 174334164,2
• Separate by commas
• If possible in (000) or (mio) Operating Expenses (222.509) -222508781,7
S&M Expenses (158.527) -158527012,4
Stores (80.518) -80517500
Warehouse (48.311) -48310500
Advertising (16.157) -16157012,44
Shrinkage (13.542) -13541999,97
G&A Expenses (63.982) -63981769,25

EBITDA (48.175) -48174617,46

Dr. Ahmet Erelçin Intro to FM 24

No Hard-Coding in Formulas

The deadliest Sin:

• You will forget that

there is an assumption
• Considered as a
fraudulent act

Large ticket Project Finance models are audited by Big4.

Don't hard code values that may change
https://exceljet.net/lessons/dont-hard-code-values-that-may-change

Dr. Ahmet Erelçin Intro to FM 25

Formulas
Sales*DSO

One row one Balance Sheet 2017A 2018E 2019E 2020E 2021E 2022E
calculation: Cash & Cash Equivalents 16.946 36.830 56.639 70.840 93.974 164.119
• Formulas starting in the Accounts Receivables
Inventories
16.603
91.789
22.222
92.878
36.207
150.297
45.286
186.804
60.075
246.321
104.916
428.636
forecast period are the Other Current Assets 12.986 17.381 28.319 35.420 46.987 82.060
same across each row Total Current Assets 138.324 169.312 271.462 338.350 447.357 779.731

Use roll-forward
calculations:
• Connects the current
period to the prior period

Dr. Ahmet Erelçin Intro to FM 26

Formulas

Write simple formulas:

• No need to show off how smart we are
• Avoid complicated formulas
• Break them into multiple cells &
simplify
• Microsoft does not charge you
extra for using more cells!

Simplify IF statements:
• Avoid complex nested IFs
• Use Boolean logic (0 or 1): MAX, MIN,
AND, OR, XLOOKUP

Dr. Ahmet Erelçin Intro to FM 27

Formulas

+C22 +C16
Reduce complexity using flags: CAPEX Loan at the Beginning
CAPEX Loan Drawdown
$0
$0 $10.000
$0 $10.000
$0
$10.000
$0
$5.000
$0
• Insert flags to yield ”TRUE/FALSE” Capex Loan Redemption $0 $0 $0 ($5.000) ($5.000)

output Capex Loan at the Yearend $0 $0 $10.000 $10.000 $5.000 $0

• TRUE is treated like a “1”, FALSE like a FX Translation Loss 0 -1248 -2596 -2025 -702

“0” Loan Drawdown FALSE TRUE FALSE FALSE FALSE

• Loan Drawdown = +C16*C22 Payment Schedule FALSE FALSE FALSE TRUE TRUE

When the year of loan drawdown is changed,

the Loan Schedule will automatically update.

Named Ranges: Replacing +H189

• Do not use at all
• You will not know exactly where it is
without going to the name manager
• You will forget to delete names though
you have deleted related cell

Dr. Ahmet Erelçin Intro to FM 28

 rate a umption u ed in a variet  of di erent place  in the model. A more  u tle example of thi  i  har
or  P  when  ou can calculate it. In other word , calculate whenever po i le.

Referencing Cells
Never re-enter the same input • Inflation = +C320 of “Assumptions” worksheet
in different places: • Never hardcode Inflation into another cell but
When you change that parameter, link it to +Assumption!320
you will forget to update the other • There should be only one reference point for
cell Inflation in the whole Workbook

Alwa  link directl  to a  ource cell a  it i  more di cult to audit “dai  chained” data

Always link directly to a

source cell

The one major exception to thi  i  when “ traight-lining”  a e period a umption . For thi , go ahead

Others might not have access to the linked-to
•
Avoid linking
rea Excel FILES
on i  that  traight-lining  a e period a umption  i  an implicit a umption, which can change, thu
files
for certain  ear  in the foreca t to ultimatel  end of with di erent a umption  than other  ear .
• Linked-to files might be moved/deleted by
mistake
Avoid formula  that contain reference  to multiple work heet Wall  treet Prep | w

https://www.wallstreetprep.com/knowledge/financial-modeling-best-practices-and-conventions/
Dr. Ahmet Erelçin Intro to FM 29
Assumptions
Static:
Corporate Tax Rate 20%
• Single entry
Tax Loss Carry Forward Years 5
• Valid over all projection period Remaining Life of Previous Losses 2

New Stores Opened

Time-Series:
2020E 2021E 2022E 2023E 2024E
• Multiple Entries
0 0 0 0 0
• Variable for each year of the 20 20 25 40 75
projection period 40 40 50 80 150
• Adds flexibility to the model 60 60 75 120 225
80 80 100 160 300
100 100 125 200 375
120 120 150 250 450
140 140 175 300 525
160 160 200 350 600
180 180 225 400 675

Combination:
Existing Store Traffic (visitor per day) 432 2020E 2021E 2022E 2023E 2024E
Bullish 3,00% 3,00% 3,00% 3,00% 3,00%
Steady State 4,00% 4,00% 4,00% 4,00% 4,00%
Bearish 4,00% 4,00% 5,50% 4,75% 4,00%

Dr. Ahmet Erelçin Intro to FM 30

Worksheets

Keep inputs together:

• Consistent, reliable
structure: The user
should update only one
cell in a single sheet to
change any assumption
• Audit: A third party can
easily review
assumptions & run a
sanity check
• Distinction: btw areas
where “the user” works
in vs. “the computer”
works in
• Error mitigation: less
likely to forget to
remove an old
assumption

Dr. Ahmet Erelçin Intro to FM 31

Worksheets
Enter the same year
on the same column
of each worksheet

Dr. Ahmet Erelçin Intro to FM 32

 Unfortunatel , there’  no e ta li hed  enchmark for when it make   en e to  eparate out 
depend  on the  cope and goal of the model. For a  imple 1-page di counted ca h  ow an
reu e, it i  prefera le to em ed input  throughout the page. However, for a large full -inte

Worksheets de t tranche  to  e u ed a group-wide template, the  ene t  of keeping all input  togethe

No  pacer column   etween data

No spacer column
between data

levator jump
Be consistent • Position of the formulae, labels & corporate logo
In long work heet , dedicating the leftmo t column for placing an “x” or another character
• Formatting: Styles, font types & sizes, choice of color
make it ea  to quickl  navigate from  ection to  ection.
palette (corporate colors)

Dr. Ahmet Erelçin Intro to FM 33

Worksheets
One long sheet beats many • Long-sheet: a lot of scrolling and less visual
short sheets compartmentalizing
• Multiple short-sheets: significant increase in the
10/8/2018
10/8/2018 The Ultimate
The Ultimate Guide
Guide to
to Financial
Financial Modeling
Modeling Best
Best Practices
Practices -- Wall
Wall Street
Street Prep
Prep
likelihood of linking errors
pre entation of re
pre entation of re ult
ult . The danger i
. The danger i  that when the model i
 that when the model i  pa
 pa ed around, it i
ed around, it i  ver
 ver  ea
 ea  to mi
 to mi  (and potentiall
 (and potentiall  
over) the hidden data.

Do not “hide” rows –”group”

them
Other users may easily miss the
hidden data.

Keeping input  (a umption ) together (for high-granularit  model )

• Very few people know how macros work
Do not use “Macro”s
Nearl  ever   nancial modeling expert recommend  a  tandard that i olate  all of the model’  hard-coded a umpt
• Some users cannot open files that use macros
(thing  like revenue growth, WACC, operating margin, intere t rate , etc…) in one clearl  de ned  ection of a model 
• Every
t picall  on a dedicated ta  called ‘input additional
.’ The macro
e  hould never  is a step closer to building
e commingled with the model’  calculation  (i.e.  al
a “black
heet  chedule , the  nancial  tatement box” (i.e. credit and 
) or output model nancial ratio , chart  and  ummar  ta le ). In
word , think of a model a  compri ed of three clearl  identi ed and ph icall   eparated component :
Dr. Ahmet Erelçin Intro to FM 34
Saving Your Files
Save always on different
versions:
ü If you lose your file for a technical
reason, you can start over from
the most recent version.
ü Did not like the latest changes
you added? Simply go back to the
latest version.

Take backups of your Model

ü Either on an external drive or on the
cloud.
ü A simple solution: send yourself an
email at the end of the working day

Dr. Ahmet Erelçin Intro to FM 35

Modeling Tip

Save deeper analysis until the model is completely

linked through.
ü Have a linked model with very general assumptions
first.

ü Make sure its Balance Sheet balances, ie it is working

correctly!

ü Then go back and improve sophistication of your

assumptions.

ü That is why building a flexible model is so important!

Dr. Ahmet Erelçin Intro to FM 36

Always:

• Lean & clean assumptions: use as few as possible

and only relevant ones for your model

• Mechanical Check: review your inputs,

calculations & outputs

• Reality Check: Does it make sense?

• Independent Opinion: Ask a third-party to review

your model before circulating it

Dr. Ahmet Erelçin Intro to FM 37

Never…
…. be satisfied with an output that looks odd:

Dr. Ahmet Erelçin Intro to FM 38

Just a Model, not Reality

Dr. Ahmet Erelçin Intro to FM 39

Bear in Mind

*Influential British statistician (1919-2013)

Dr. Ahmet Erelçin Intro to FM 40