Professional Documents
Culture Documents
There are three items that are a aprt of every financial statement - Profit and Loss Account, Balance She
Profit and Loss Account - will tell you how much profit/ loss a company has enjoyed/ suffered! Periodic!
Answer Option B
P/L will be reset to 0 at the end of a period! That is why we say P/L is periodic!
Balance Sheet - Balance Sheets are not periodic!
If Reliance Balance - Debtors - people who owe money to Mr Ambani/ Reliance - 5 Cr as of March 31, 202
on April 1 is 10L.
just because a period is over, if you owe Reliance money, don’t think that they will forgive the
You still owe Reliance money!
Knowledge?
Promoters, owners, accountants, chartered accountants - anybody with knowledge and not explicitly barre
Why do we need financial statements?
Analysis!
Answer ! It is the responsibility of both the directors of the company, as well as the auditors!
Sathyam Infotech?
FS were prepared wrong! The auditors audited it, and said "Brilliant FS"!
So people invested in the company, gave loans, etc!
If anything is wrong with the FS -> both auditors as well as the directors will be held responsible?
Mandating - made compuslory -> by a lot of laws and regulations - > is called Sarbanes Oxley Act!
Responsibility -> is only with the people who sign the FS!
Option A! $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Lot of money!
immateriality! - it matters, but it wont change the way you look at something.
Lets take that example of the scene from DDLJ - SRK in the train, and Kajol running to catch it!
Immaterial items - will not impact you as a whole! Material items will!
Do we really prepare financial statements or models in excel? Is that what happens in a corporate?
There are a lot of other tools, with better protection! Data = gold?
Tally! - that helps with FS!
Quantrix! - that helps with financial models!
SAP - this is an ERP! Enterprice resource planning!
Tableau! - very interesting, please google!
But excel is the most convenient! Would definitely encourage taking a look at the other softwares too pos
THE END!
General Ledgers - Purchase, Sales, Inventory, Fixed Assets
Purchase Ledgers!
There are two varities of modelling a ledger - but before we get into it -
what is a ledger?
it's simple!
There are different pathways to arrive at the P/L of a company! That is - when a transaction is executed, it passes through different books of record!
For eg - Reliance buys a huge factory outlet for making clothes! Reliance Apparels! (Imaginary!)
All of our discussion in financial modelling will be with respect to Reliance Apparel!
This is a brick and mortar cloth store (imaginary!) that makes clothes, sells it and makes money!
I'm going to walk you through how Reliance Apparel purchases, records transactions and all we will be modelling some sample transaction for Reliance!
We are only going to look at purchase related items for Reliance Apparel!
Purchase Ledger / Sales Ledger - > Cash/ Debtors/ Creditors Book -> Trial Balance -> Trading P/L -> Balance Sheet and Cash Flow Statements
Purchase Ledger - is to record all purchases! However you want! Accounting rules do not matter in modelling! As long as logical sense prevails!
Option A Reliance Apparel purchases 100 kgs of wool for stitching purposes! This is one year! So purchase!
Option B Reliance Apparel purchases the factory - and when we say factory here - we mean the entire land, building, construction etc.! The factory will l
Option C Reliance Apparel purchases some stitching machines for stitching the clothes! Not one year, > 1 year! So fixed assets!
Anything that is related to trading! Related to expensing in one year - all of this is going to be called puchases!
Anything that can be used for > 1 year - don’t model it as a purchase - model it as a fixed asset! DON’T BREAK YOUR HEAD ON WHAT A FIXED ASSET IS
Date Purchased Item Tax Gate Pass No. Amount (CTRL + B = BOLD)
ALT + O + C + A Jan 1, 2021Wool 10% MH-4-01012021-102 20,000
TO fit content!
Model Parameter! [1] Imagine Reliance Apparel in the beginning (2021 January!) decides to make only winter clothing!
Its main input is wool purchased from local wholesale delaers, and main output is the sweaters it makes under the fancy brand called RA!
It makes sweaters only in one color - black!
For similar sweater manufacturers, the proportion of wool required per sweater is between 3 kg -5 kg depending on the sweater size!
Sweater is made in three sizes - Small, Medium and Large!
Mrs Ambani who owns RA - expects to sell 1000 sweaters in 2021, increasing it by 10% every year till 2025.
Proportion of sizes for sweaters sold in 2021 - 4:3:3 :: S:M:L
What do you have to model? Model the purchase of wool required and show an extract in the purchase ledger assuming in 2024, purchase returns was 10
Sales (No. of Sweaters!) 400 300 300 440 330 330 484 363 363 532 399 399
How much raw material is required?
Assume: 3kg for small 3 4 5 3 4 5 3 4 5 3 4 5
4 kgs for medium
5 kgs for large 1,200 1,200 1,500 1,320 1,320 1,650 1,452 1,452 1,815 1,597 1,597 1,997
Purchases 1,200 1,200 1,500 1,320 1,320 1,650 1,452 1,452 1,815 1,597 1,597 1,997
Amount post Purchase Return 1,200 1,200 1,500 1,320 1,320 1,650 1,452 1,452 1,815 1,775 1,775 2,218
Cash sales or credit sales - important that we know how much is being sold!
Reliance Apparel (RA) is now going to project their sales for the year 2021!
How do you know how much to sell/ how much to sell for in order to break even/ make a profit?
Revenue = Units * SP
As Units Increase, this Curve will go up! You price / revenue goes up!
This inflection point - > the point where the graph changes direction, you should selling!
In L
Scenario A Maruti produces and sells 1000 Wagon Rs at 7 L/ car! 7,000
Scenario B Jaguar produces and sells 200 Jags at 30 L/ car! 6,000
Scenario C TATA produces and sells 10000 Nanos at 2 L/ car! 20,000
TESLA is the best example! They havent hit their inflection point yet! It means the more they se
Once they hit the inflection point, they need to reassess their production capabilities!
RA!
Model Parameter! Reliance Apparel needs our help to understand how much sales actually is required to
A Break Even!
B Make a 10% profit!
Minimum Scenario!
Break Even! Zero Proft and Zero Loss! 58.97 per unit!
Profit at 10% 64.87 per unit!
Maximum Scenario!
Break Even! Zero Proft and Zero Loss! 57.58 per unit!
Profit at 10% 63.34 per unit!
Fixed Costs will reduce as you produce more! Why? Because it is spread across more units!
100% Cap - Fixed Cost per Unit 2.08
60% Cap - Fixed Cost per Unit 3.47
Diff - due to increase in capacity! -1.39
Units are not being determined here - only the selling price!
Why? We can only model the Selling Price! Units are arrived at based on -
1. Factory Capacity
2. Market conditions
3. Competition
4. Market Size!
Imagine a restaurant- Pizza Hut! Different types of cheese and breads stored!
What happens if you story 45 days worth of vegetables at any point in time?
It gets spoilt!
Storing too much inventory is actually bad, because of costs and spoilage!
Your bread and cheese could spoil + you will also be keeping your regrigerator on for a longer time for 45 days! More electricity! More contamination, more rats? Mo
More costs!
Imagine it takes 4 days for your bread delivert to come through once you order!
1 2 3 4 5 6 7
yes yes yes yes yes yes
Order
RA!
Model Parameter Imagine RA needs 100kg of wool everyday for manufacturing!
Most wool is available from Punjab and HP, and taken 10 days to come to Mumbai! RA's factory is in Mumbai!
Once wool is purchased, the cost of storing 1kg of wool is 5 Rs/ day! Warehousing cost, security, etc.
100 kg of wool - can make 100 sweaters, each sweater is sold at 1000 Rs.
Scenario A You keep inventory for 7 days! And you order every 7 days! So basically you order 7 days worth of inventory!
Scenario B You keep inventory for 15 days! And order after 5 days!
Scenario C You keep inventory for 10 days! And order is placed on the first day!
Remember - > Lower inventory cost because you don’t sell anything does not mean its good! 7 Day cycle is the cheapest! But just because it is 7 days and we don’t sell for 3 days -
there is a chance that you will lose market share!
Summary!
2 costs for inventory!
1 Costs of maintaining invenotry - warehousing, storage costs etc.
2 Costs of not maintaining inventory - opportunity costs, loss of market share etc.
You need to model both costs when you look at inventories! Do not forget!
THE END!
Fixed Assets!
Inventory is something you buy to sell! Purchase and sale of inventory happens in the same period!
Fixed Assets - are purchased not for sale but for use in order to get a better output!
For eg -
IT companies - computers, desks, tables, chairs, etc.
Manufacturing - machinery, plant, etc.
Software companies - software used for coding etc.
What is the issue with modelling for fixed assets? A fixed asset -eg. Air Conditioner - can be used for max 10 years!
what will you write off in order to bring the asset value to zero ?
Option A You will bring it to 0 in 2031 PL - meaning you will reduce the entire 1L in 2031.
Option B You will bring it to 0 in 2021 PL - meaning you will reduce the entire 1L in 2021.
Wildcard You will bring this to 0 evenly over a particular range of years - this range is determine by the life of the asset!
You cannot write off the fixed asset in a single year because its not fair!
Regulations have clearly said that fixed assets have to be written off across the life!
Fixed Assets
Date Asset Name Amount
2021 Computer 1L
2021 Depreciation for 2021 -10K 1L / 10 = 10K!
2021 Closing Balance 90K
If a fixed asset is depreciated to 0, does it mean you have to throw it off? NO!
You can continue using it! No problem! Just that the extra years you use it, there will not be any depreciation charged. Why?
Because the FA is already at 0!
2,764,000 2,764,000
Balance Sheet
Fixed Asset xxx
Reserves and Surplus 2,374,000 Inventory xxx
THE END
Capital
Issued capital - how much the company actually issues <= Authorized share capital!
it can never ever be more!
Auth Cap >= Issued Cap >= Alloted Cap >= Called up and paid up Cap
Control Check! Formula to make sure there are no fat finger errors!
fat finger error - is when you type random numbers because you are not on a diet = fat
Balance Sheet Amount Control Check - only for chec
Capital and Liabilities
Capital - Authorized Share Capital 100 TRUE
Capital - Issued Share Capital 100 TRUE
Capital - Allotted Share Capital 100 TRUE
Capital - Called up/ Paid up Share Capita 100
In 2022, RA wants to issue a further 1.5L of capital, and get 2.5x the applications for this amount.
RA allots the entire 100% of issued capital.
In 2023, RA wants to call back 10% of its total issued capital at 100% the FV. Do not worry about how/ w
Answers
Checks
TRUE
TRUE
TRUE
2022
Balance Sheet Amount Notes
Capital and Liabilities
Capital - Authorized Share Capital 1,000,000
Capital - Issued Share Capital 1,000,000 2021 - 8.5 + 2022 - 1.5 = 10L
Capital - Allotted Share Capital 1,000,000 2021 - 8.5 + 2022 - 1.5 = 10L
Capital - Called up/ Paid up Share Capita 1,000,000 2021 - 8.5 + 2022 - 1.5 = 10L
Checks
TRUE
TRUE
TRUE
2023
Balance Sheet Amount Notes
Capital and Liabilities
Capital - Authorized Share Capital 1,000,000
Capital - Issued Share Capital 900,000 10L issued - 10% of 10L called back = 9L
Capital - Allotted Share Capital 900,000 10L issued - 10% of 10L called back = 9L
Capital - Called up/ Paid up Share Capita 900,000 10L issued - 10% of 10L called back = 9L
Checks
TRUE
TRUE
TRUE
THE END
Cash
Cash is an asset for any company! How much cash is held depends on the kind of company!
Let us look at some examples - if you are modelling restaurants - cash will generally be high/ low dependant on the type of restaurant!
Just because cash is low, does not mean the restaurant is bad!
Just because cash is high, does not mean the restaurant is super profitable!
Can we think of an industry that is low on cash? That is, no cash more credit?
automobile industry!
manufacturers!
A lot of manufacturers, produce cars/ manufacture cars - give it to the retailers and are paid only after the retailers sell the cars!
Maruti also has suppliers - seats, seat covers, brake shoes, steel etc. who will be supplying on credit.
Assets
Fixed Assets xx
Current Assets xx
Cash and Cash Equivalents xx
Cash - Notes, Coins etc.
Cash Equivalents - Sodexho, Cards etc.
Model Parameters
Model A - TESLA!
Order: $1M This is for all TESLA cars put together in $$$ value!
Production 10% $100K!
Revenue 100$ of Production $100K!
Credit/ Cash Mix! 50:50 $50K Realized!
Balance Sheet
Assets
Cash and Cash Equivalents 50,000
Order: $100k
Production $100K Evertyhign that is ordered for in the restaurant is produced and sold! Nobody
3 months!
Revenue: $100K You get paid for everything you sell - no credit payments at pizza hut! Is a cre
NO!
When you use a credit card - you get paid immediately by the bank!
Which means, the moment you use a card it is a credit for the customer and c
Credit: Cash Mix: 0:100 You realize the entire amount that you sold the pizzas for!
Balance Sheet
Assets
Cash and Cash Equivalents 100,000
Summary!
What is the linkage to cash?
Modelling cash is important - no doubts about it!
Cash flow is super important!
Any gov company in India - cash flow is the prob - great profits sometimes but not great cashflow!
BUT! Look at more than just the cashflow! Look at the bigger picture! Do not think cash flow is everything!
THE END!
Sundry Creditors
If you make a purchase, and you don’t give cash - you have to record the fact that you didn’t pay for the purchase!
That 'owing of money' is called having a sundry creditor!
Balance Sheet!
Liabilities
Long Term Liabilities
Short Term Liabilites
Sundry Creditors
Greater than 6 months
Less than 6 months
Assets
Indenting!
When you draw up a BS in a financial model, make sure you left/ right indent accurately.
Why is that important?
If you don’t indent, what happens is that your liabilities, assets and in our example, >< 6 months will al
Is that correct?
NO!
Your greater than/ less than 6 months, is technically not a part of the BS, but a part of the Sundry Cre
is a part of liabilities, which is a part of Capital and Liabilitie, which is a part of the BS !
Scenario 1 - you own a chaat shop in the main road! Expenses - electricity, pani puri, sev, papdi, curd, etc Road side! YOU WIL
Scenario 2 - you own Haldirams. Bikanerwala! Expenses - electricity, pani puri, sev, papdi, curd. Shop in a mall! BIG BRAN
Model!
THE END!
Sundry Debtors
Who are sundry debtors? And why are they recognized on our B/S?
High SD - good or bad?
People who owe money to you! Why? Because you provided them some sales or service!
Why ar ethey recognized?
Because anybody who is analysing a company - would have only taken a look at the P/L.
When you make a sale/ service - you recognize it in the P/L - but how much was it actually received?
Your P/L looks as good as gold! But is worht nothing - because you wont receive any money for it!
Very important - debtors are being analysed!
Industries!
L/T Power Transmission! Governemnt - power bodies!
IOCL! petrol bunks!
Restaurant - have no S/D Why? Because there is no credit transaction!
Reliance Apparel retailers - who will buy from RA, and sell to the ultimate consumer!
Balance Sheets!
Assets
Fixed and Long Term Assets
Current and Short Term Assets
Cash
Sundry Debtors
Less than 3 months NEVER forget to Indent!
Greater than 3 months
Model Parameters Reliance Apparel - they have sales targets of 1,500 units sold per day! They expect this target to go up by 10% in the second half of the
Expected value of sales is 500/ sale!
They also expect to realize 10% as advance, 10% in three months and the rest in 6 months. In case this is not paid within 6 months, a pe
is due!
Calculate using financial modelling - how you can forecast the year end Sale Value, Cash Realized and Sundry Debtors!
End of Year Sale Value 283,500,000 Volume Driven Business - better sales because of more units sold, not because of high
Three months Installment! For all periods except sales made from Oct 1
We are preparing FS for Jan - Dec - so any sale made 3 months before Dec will be realized (10%), but if made after Oct 1, high chance t
3 Months Installment 20,925,000 (First 6M Sales Value x 10% Rec'd) + (Second 6M Sales Value x 10% x 50%)
Six Months Installment! For all periods except sales made after July 1
We are preparing FS for Jan - Dec - so any sale made 6 months before Dec will be realized (80%), but if made after July 1, high chance
Cash 157,275,000
THE END
Trial Balance
It will tell you if all your debits and credits - two sides of any entry! Are accurate!
If you miss any one side, or if the entry is posted to a wrong account, it will throw an error!
There will be totals for both the debit and credit column!
Your debit total must be equal to your credit total!
My favourite? Checks! This is only if you are doing it on an excel!
Checks Formula
Check 1 - Debit total should be equal to credit total! IF Formula
Check 2 - a single ledger can have only a debit balance or a credit balanc IF formula
Check 3 - ensure ledger balance is carried forward accurately to TB IF formula
Option 1 I will updated all ledgers on a daily basis, as and when transactions happen, and then update to TB at e
Option 2 I will update all ledgers on a daily basis, as and when transaction happen, and simultaneously the TB w
ledger is updated
THE END
Trial Balance
RULE OF LAW!
Whenever a ledger has more debit items than credit items, it is called a debit balance. Assets - Debit Revenues - Credit
Whenever a ledger has more credit items than debit items, it is called a credit balance! Liab - Credit Expenses - Debit
Ledger D/C
Purchase Ledger D
Sales Ledger C
Capital ledger C
Cash Books D
Inventory D
Fixed Asset D
Sundry Debtors D
Sundry Creditors C
Loans C
Security Premium C
Salary A/C D
Expense A/c D
Purchase Return C
Sales Returns D
Depreciation D In B/S, it is a reduction from Assets, therefore has the same sign as Assets have - D
In P/L they are expenses, therefore D.
Trial Balance
Ledger
Capital Ledger
Debit Credit
Particulars Amount Particular Amount
Cash Ledger
Debit Credit
Particulars Amount Particular Amount
Purchase of Wool - Cash
Capital Invested 100,000 Paid 50,000
Second Investment 100,000
Sale of Wool 50,000 Control Check
Total 250,000 Total 50,000 200,000 GOOD BOY
Purchase Ledger
Debit Credit
Particulars Amount Particular Amount
Control Check
Total 50,000 Total - 50,000 GOOD BOY
Inventory Ledger
Debit Credit
Particulars Amount Particular Amount
Control Check
Total 50,000 Total 50,000 - GOOD BOY
HOLD ON TO THE TRADING P/L CALC I AM DOING HERE, JUST IMAGINE YOU UNDERSTAND, YOU WILL GET IT WHEN I DO TRADING P/L IN THE NEXT CH
Sales Ledger
Debit Credit
Particulars Amount Particular Amount
Control Check
Total - Total 50,000 50,000 GOOD BOY
THE END
Trading A/c
The net amount from a trading account is either called a gross profit or a gross loss!
Trading A/C is not mandatory! This information, if required can be incorporated in a Profit and Loss A/c.
Only expenses related to a trade can form a part of your trading A/C
Trading A/c or P/L A/c
Sales of goods Trading A/C Direct linkages
Cost of goods sold Trading A/C Direct linkages
salaries to admin staff Profit and Los No direct linkage to sales made.
salaries to plumber Trading A/c o If the plumber is directly involved in the production process - Trading A/c, if he is like a head office plumber - P
salaries to factory workers Trading A/C Direct linkages
electricity to factory office Trading A/C Direct linkages
electricity to head office Profit and Los No direct linkage to sales made.
rent for factory Trading A/C Direct linkages
rent for head office Profit and Los No direct linkage to sales made.
Petrol/ Diesel for factory Trading A/C Direct linkages
Machinery rental Trading A/C Direct linkages
Furniture rental Profit and Los No direct linkage to sales made.
GM/ GP - is nothing but the profit you make on sales, without considering your extra overheads.
Amazon! Can never have a negative GP! Why? They buy from wholesalers and sell to retailers, but don’t owe anything to the wholesalers until they make
Cloudtail!
Whenever there is a trade doen, either purchase or sell - you need to update the Ledger, TB as well as the Trading Accoutn immediately!
Put necessary checks in place! Also make sure this is formula driven!
THE END
Profit and Loss A/c
1 What is a P/L?
2 What gets captured within the P/L A/C
3 What is Net Proft/ Net Loss.
4 What does High NP, but Low GP or Low NP and High GP mean? Analysis!
5 Modelling P/L - how to incorporate the entire explosion infrastructure within the P/L workflows!
What is P/L?
P/L is nothing but a total of all revenues earned by the firm, minus all expenses incurred by the firm.
This is an expansion of the Trading A/C - under Trading we only saw trade related revenues and expenses - under P/L we will see all revenues and
The first starting point in a P/L is the ending point of a Trading A/C
Rule! All revenues items/ expense items will only be added once - either in the trading account or in the P/L account
Never add it in both
Rule! Not necessary that you need to prepare a separate trading account and a profit and loss account
You can combine both …..but! You will not show GP in that case - you will only see NP!
What does High NP, but Low GP or Low NP and High GP mean? Analysis!
Modelling P/L - how to incorporate the entire explosion infrastructure within the P/L workflows!
Debit Credit
Particulars Amount Particulars Amount
Gross Loss B/D xxx Gross Profit B/D
All Non-Revenue Items - Sale
All Non-Revenue related of Furniture, Sale of
expenses xxx Machinery, etc. xxx
Dep on Furniture xxx Rent Received xxx
Rent on offices xxx
Salary Paid xxx
Example!
Trading A/C
Debit Credit
Particulars Amount Particulars Amount
Sales 15.00
THE END
Balance Sheet
1 What are Balance Sheets? What are the two different aspects?
2 What accounts come under which aspect of the Balance Sheet?
3 Indentation, Alignment and Formatting!
4 Explosion Infrastructure for Balance Sheets!
5 Modelling Balance Sheets for the future - forward looking Balance Sheets!
What are Balance Sheets? What are the two different aspects?
Balance Sheets are period to date information, where the period starting is when the company went live!
Company was launched in 1998 - B/S date is 2021….. Your sundry debtor balance is the balance as of 2021, but considered from 1998!
In the P/L. when your year ended, all the numbers were reset to 0. You CANNOT DO THAT with a BS.
Balance Sheet numbers are carried forward to the next period, and the period after, so on and so forth.
If your Sundry Debtors as of Dec 31, 2020 10L which means as of Dec 31, you have to receive 10 L from
If your Sundry Debtors as of Dec 31, 2021 0 What does it mean?
It means
1 All 10L was paid up, tand no further de
2 Or no paid up, all debtors became bad
Balance Sheets -
Liabilites Assets
Particulars Amount Particulars Amount
Total - Total -
Assets
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Liabilities
x
x
x
Assets are bunched together - these are amounts owned by the company or owed to the company by external ppl - Fixed Ass
1I Liabilities
2I Long Term Liabilities
3I Loans and Borrowings
3I Sundry Creditors
2I Short Term Liabilities
3I Sundry Creditors
3I Handloans
Total xxx
0I Assets
1I Fixed and Long Term Assets
2I Fixed Assets
2I Investments
1I Current and Short Term Assets
2I Cash
2I Sundry Debtors
Control Check
Total xxx GOOD BOY
Indentation It is how you put values inside a cell! if I say indent it, it means you need to make sure all cell wise data is
Alignment It is how difference cells put together are set up! If I say align it, you need to make sure all cells are accurate!
Formatting Is putting bold, underline, etc.
Shortcut keys
Indenting ALT + H + 6 For a single indent - repeat if you want multiple indenting to the right. For left, use 5 instead of 6
Alignment Copy + paste is your best option - CTRL + C, or CTRL + V. But if you want to try something fancy, go ahead. But recheck form
Center, left, Right Align ALT + H + AC/AR/AL For Center, AC, For Left, AL and for Right, AR.
Formatting
Color Fill ALT + H + H + Color Color - whichever color you want, no color, type N
Underline CTRL + U
Bold CTRL + B
Font ALT + H + FF Type font name that you want!
THE END
Explosion Infrastructure for Balance Sheets!
Trying to make sure one entry to a ledger - updates the Trial balance, Profit and Loss Account and the Balance Sheet simultaneously.
Let us assume from the beginning that Reliance Apparel is actually just going to be launched by Mr Ambani!
Control Check
Total Awesome!
Total 600,000 Total 100,000 500,000
Trial Balance
Capital 100,000
Cash 500,000
Loan 500,000
Purchases 100,000
Debit Credit
Balance Sheet
Liabilities
Loan Account
Debit Credit
Purchases Account
Debit Credit
Control Check
Total Awesome!
Total 100,000 Total - 100,000
THE END
Future Looking Statements - Sales, Purchase, Inventory and Fixed Assets!
What we have done till now - is show how a present recording of financial transactions can be modelled on an excel!
If we make 1 transaction, we have seen the effects of that transaction in our ledgers, P/L, Cash flows and in the Balance Sheet!
Our explosion infrastructure will be able to capture all of these transactions - as long as they are in the present and as long as the model is set up ac
But….
what about future transactions, what if you are asked to make predictive models?
Reasonable assumptions will have to be backed up by industry standards, as well as data analytics.
Let us take 4 basic items first and see how to make forward looking models for these items!
1 Sales
2 Purchase
3 Inventory
4 Fixed Assets
Sales - we know what sales is dependent on! Units sold x Value per unit!
Units X Sale Value/ Unit
sales numbers will go up - if units sold increase, and SVPU (Sales VALUE PER UNIT) remains constant.
sales numbers will go down - if units sold decrease, and SVPU is constant
sales value will go up - if units sold are constant, but SVPU increases
sales value will go down - if units sold are constant, but SVPU decreases
Model Parameter We are RA! We have just started the business in 2021 - the plan is to expand to more regions in 2022, but we are not sure if we can increa
In 2024, we will bounce back but not entirely, and 2025 levels will be back to 2021 levels. You are free to make assumption to make sure yo
1,250 Sales
Units
1,000
SVPU
750
500
250
DIY! Try to model purchases for RA using the same assumptions we used and having a 10% profit margin for the supplier!
THE END
Cash Flow Statements
We need to make sure we model cash flow statements for only cash moves, this will help readers of the financial statement to decipher how much of the activity has been cash-impacting
and how much is non-cash.
Anyone analysizing financial statements will want to know how much of the sales/ business you made were in cash/ realized cash?
Therefore, everyone will take a look at cash flow statements.
The net result of both methods is to say that Opening Cash balance + Activities during the year - Closing Cash balance = 0.
Direct
Operating Activity +/- Only cash related operating activites are included. So any cash purchase, cash sale, cash paid, cash recd,
Investing Activity +/- Only cash invested, and cash de-invested.
Financing Activity +/- Only cash rec'd as loan, or cash debt raised or cash repayments will be included.
Opening Cash +
Closing Cash -
1 Purchase made for 100 Rs, out of which 70Rs paid in Cash - Only 70 Rs paid in cash will be included in the direct cash flow statement.
2 Sales made for 150 Rs, out of which 120 Rs paid in cash - only the 120 rs that you paid in cash will be incldued within your direct cash flow statem
3 Rec'b for good sold, paid us 100 Rs - you will include the entire 100 Rs.
4 Payable for purcases - we paid 50 Rs - you will include the entire 50 Rs.
Investing activity -
1 We rec'd a stock dividend of 500 shares - wll you include or not? NO! This is not cash related, so should not be included!
2 We rec'd a cash dividend of 10K rs. - YES, since this is cash related!
3 We invested 15K in cash. - Yes, to be included since this was investment in cash!
4 We invested in an options contract for 1 L, by paying a premium of 1000 Rs. - Your actual cash outflow/ inflow is only 1K. Not 1L, therefore include
5 We redeemed out of an ETF investment for 1 L. - just a simple 1L included, since you will receive cash when you redeem out!
Financing -
1 All interest payments.
2 All loans taken (as long as this is in cash)
3 All loans repaid.
4 Further issue of equity - include or not? YES! Because you are receiving cash against this issue of equity.
Indirect Method
Operating Activity
Net proft
Minus all non cash activities in net profit
Model for Indirect Method! Because this is the most frequently used, and is also easier because all your items are included already, you only need to back out!
Operating Activity
Net Income xxx
Add: Non Cash Items
Depreciation xxx No cash, added back
Increase in accounts rec'b xxx This signifies an increase in debtors - so no cash was rec'd
Decrease in payables xxx This signifies a decrease in creditors - so no cash was paid
Financing Activity
Financing Inflows xxx
Financing Outflows xxx
Investing Activity
THE END
Inventory - different models of inventory!
For a storekeeper model, how will you decide which inventory has to go out if one of the above is followed?
HIFO - Highest In First Out - the costliest inventory should first be used for sales purposes.
If you have 10 different items in your warehouse, and all 10 items are different costs of procurement. HIFO will tell
Why?
Profits are reduced, therefore tax is reduced.
Inventory Ledger
Under HIFO
Units Cost
100 700 70,000 600 60,000
20 650 13,000 600 12,000
120 83,000 72,000
Under LIFO
You will sell whatever came in last, first! Why? So when petrol is pumped into an underground tank, the petrol you
pumped petrol.
Profit 13,000
Under FIFO
We sell the first procured products first! Example - bakeries, food products!
Profit 52,000
Model Parameter You are running a restaurant called McB! You make great burgers - you are asked to model the actual net profits
restaurant has to pay 50% of tax on profits.
HIFO
MAX Formula is used
Net Prfit 0
Tax 0
FIFO
MAX Formula is used
1 You will be given a current Fixed Asset scenario - you need to predict how the future will look!
2 If you want to predict how the future will look, you need to know how long the fixed asset will be in circul
3 Usint point 2, you will get a fair idea of depreciation - will be handled in the next class!
4 Remember - dep is useful! Why? It is not actually an expense but gets you tax benefit. Higher the dep,
5 Different models for depreciation - you need to know which model works best for you.
THE END
Depreciation and Working Capital
Depreciation
Depreciation is the systematic writing off of fixed assets of the firm over a period of time - determined by the life of the asset.
Fixed Asset is generally recognized first in the Balance Sheet at Cost!
At yearly intervals, this amount is reduced from the BS/ and taken to the P/L - this is called depreciation.
You will write off the fixed asset evenly across the life of the asset!
If life - 10 years, straight line method says your value of dep = FA cost/ life
It will depreciate the asset more when the asset is in the beginning stage, and lesser when the asset is in the later stages
Problem - the asset might not evenly depreciate, not easy to calculate.
Parameter Model We have a car worth 10L, brand new bought for Reliance Apparel.
The life of this car is conservatively estimated to be 17 years. WDV - 0.085%
Calculate dep on this car under SLM and WDV - written down value. Rate 0.09%
I want to know what is the dep calculable at the 16th year under both methods.
30 sec
SLM
Cost 1,000,000
Life 17
Dep 58,824 on the first year as well as on the 16th year, this dep amount will remain the same!
WDV 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
Cost 1,000,000 999,150 998,301 997,452 996,604 995,757 994,911 994,065 993,220 992,376 991,532 990,690 989,848 989,006 988,166 987,326 986,486 985,648 984,810 983,973 983,137 982,301 981,466 980,632 979,798 978,965 978,133 977,302 976,471 975,641 974,812 973,983 973,155 972,328 971,502 970,676 969,851 969,026 968,203 967,380 966,558 965,736 964,915 964,095 963,275 962,457 961,639 960,821 960,004 959,188 958,373 957,559 956,745 955,931 955,119 954,307 953,496 952,685 951,876 951,066 950,258 949,450 948,643 947,837 947,031 946,226 945,422 944,618 943,815 943,013 942,212 941,411 940,611 939,811 939,012 938,214 937,417 936,620 935,824 935,028 934,233 933,439 932,646 931,853 931,061 930,270 929,479 928,689 927,900 927,111 926,323 925,535 924,749 923,963 923,177 922,393 921,609 920,825 920,042 919,260
Dep 850 849 849 848 847 846 846 845 844 844 843 842 841 841 840 839 839 838 837 836 836 835 834 834 833 832 831 831 830 829 829 828 827 826 826 825 824 824 823 822 822 821 820 819 819 818 817 817 816 815 815 814 813 813 812 811 810 810 809 808 808 807 806 806 805 804 804 803 802 802 801 800 800 799 798 797 797 796 795 795 794 793 793 792 791 791 790 789 789 788 787 787 786 785 785 784 783 783 782 781
Ending Cost 999,150 998,301 997,452 996,604 995,757 994,911 994,065 993,220 992,376 991,532 990,690 989,848 989,006 988,166 987,326 986,486 985,648 984,810 983,973 983,137 982,301 981,466 980,632 979,798 978,965 978,133 977,302 976,471 975,641 974,812 973,983 973,155 972,328 971,502 970,676 969,851 969,026 968,203 967,380 966,558 965,736 964,915 964,095 963,275 962,457 961,639 960,821 960,004 959,188 958,373 957,559 956,745 955,931 955,119 954,307 953,496 952,685 951,876 951,066 950,258 949,450 948,643 947,837 947,031 946,226 945,422 944,618 943,815 943,013 942,212 941,411 940,611 939,811 939,012 938,214 937,417 936,620 935,824 935,028 934,233 933,439 932,646 931,853 931,061 930,270 929,479 928,689 927,900 927,111 926,323 925,535 924,749 923,963 923,177 922,393 921,609 920,825 920,042 919,260 918,479
Control Checks Ending Cost - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Dep - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Beginning C - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Parameter Model Reliance Apparel is confused between two life term machines it wants to buy!
Machine A costs 10 L, will be available for atleast 50 years, and has a dep rate of 1.5%, at the end of this pariod, whatever remaining value will be sold for 5,000 Rs.
Machine B costs 15 L, will be available for 65 years, and has a dep rate of 0.9%, at the end of this period, whatever remaining will be sold for 3500 Rs.
Calculate which machine will give you more tax benefit, which machine will give you better life, and the 42nd and 49th year of depreciation for both machines.
Assume the tax rate in question is 10%.
Value 374,417
Total Cost 1,000,000
Tax Benefit 62,558
WDV 90.00% Life 65 Tax 10% COST of OP 563,025
Machine B
Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
Cost 1,500,000 1,477,500 1,455,338 1,433,507 1,412,005 1,390,825 1,369,962 1,349,413 1,329,172 1,309,234 1,289,596 1,270,252 1,251,198 1,232,430 1,213,944 1,195,734 1,177,798 1,160,131 1,142,729 1,125,588 1,108,705 1,092,074 1,075,693 1,059,558 1,043,664 1,028,009 1,012,589 997,400 982,439 967,703 953,187 938,889 924,806 910,934 897,270 883,811 870,554 857,495 844,633 831,963 819,484 807,192 795,084 783,158 771,410 759,839 748,442 737,215 726,157 715,264 704,535 693,967 683,558 673,304 663,205 653,257 643,458 633,806 624,299 614,934 605,710 596,625 587,675 578,860 570,177
Dep 22,500 22,163 21,830 21,503 21,180 20,862 20,549 20,241 19,938 19,639 19,344 19,054 18,768 18,486 18,209 17,936 17,667 17,402 17,141 16,884 16,631 16,381 16,135 15,893 15,655 15,420 15,189 14,961 14,737 14,516 14,298 14,083 13,872 13,664 13,459 13,257 13,058 12,862 12,669 12,479 12,292 12,108 11,926 11,747 11,571 11,398 11,227 11,058 10,892 10,729 10,568 10,410 10,253 10,100 9,948 9,799 9,652 9,507 9,364 9,224 9,086 8,949 8,815 8,683 8,553
Closing Cost 1,477,500 1,455,338 1,433,507 1,412,005 1,390,825 1,369,962 1,349,413 1,329,172 1,309,234 1,289,596 1,270,252 1,251,198 1,232,430 1,213,944 1,195,734 1,177,798 1,160,131 1,142,729 1,125,588 1,108,705 1,092,074 1,075,693 1,059,558 1,043,664 1,028,009 1,012,589 997,400 982,439 967,703 953,187 938,889 924,806 910,934 897,270 883,811 870,554 857,495 844,633 831,963 819,484 807,192 795,084 783,158 771,410 759,839 748,442 737,215 726,157 715,264 704,535 693,967 683,558 673,304 663,205 653,257 643,458 633,806 624,299 614,934 605,710 596,625 587,675 578,860 570,177 561,625
Tax Benefit 2,250 2,216 2,183 2,150 2,118 2,086 2,055 2,024 1,994 1,964 1,934 1,905 1,877 1,849 1,821 1,794 1,767 1,740 1,714 1,688 1,663 1,638 1,614 1,589 1,565 1,542 1,519 1,496 1,474 1,452 1,430 1,408 1,387 1,366 1,346 1,326 1,306 1,286 1,267 1,248 1,229 1,211 1,193 1,175 1,157 1,140 1,123 1,106 1,089 1,073 1,057 1,041 1,025 1,010 995 980 965 951 936 922 909 895 882 868 855
Value 561,625
Total Cost 1,500,000
Let me ask you a question - what cost of machine will bring my value to 0 at the year 65? Tax Benefit 93,838
Assume same WDV rate as Machine A COST of OP 844,538
Value 1
Total Cost 1,000,000
Tax Benefit 100,000
COST of OP 900,000
Scenario Analysis!
Will tell you what values will bring what results - you can create a model and plug in different numbers, and with these different numbers, we will look at results!
The beauty of a good model is that you will be able to scenario analyze a lot of different items.
Along with scenario anaylsis, financial modelling also makes use of tools like monte carlo simulation! You will be simulating multiple factors - can be done with an excel but generally
more cumbersome.
You can use Monte Carlo analysis with complex SQLs, Pythons etc.
Closing Comments -
Depreciation is non-cash so make sure you never model it into a direct cash flow statement.
Indirect cash flow statement - you can model depreciation but ensure this is done accurately!
THE END
Working Capital
Payables - expenses payable, creditors payable, salary payable, rent payable etc.
Asset Liability Mgmt - so once your expenses are finalized, you need to ensure you have sufficient assets to meet those expenses.
Which means - we first need to model our expenses!
and then we would have to manage our assets to meet those expenses.
There are two types of working capital - gross working capital and the next is net working capital.
Gross Working Capital = Current Assets = Cash + Sundry Debtors + Inventory (anything that can be made liquid in a reasonably short point of time)
Net Working Capital = Current Assets - Current Liabilities (Sundry Creditors, Liabilities Payable and rent/ expense payable etc.)
If you know the current liability value, you can model your assts accordingly and arrive at how much assets you need!
Change in Net Working Capital = NWC for current year - NWC for previous year.
Current Liabilities
Sundry Creditors D 2 2 1 3 0 Buy cheaper, also make sure you use the correc
Other Payables E 4 4 3 5 2 Incur less expenses, so that you wont have spen
Model Parameter
Reliance Apparel is trying to model working capital for the next 6 month. They expect current sales to increase by 50%, out of which 30% will be in cash. Curren
They also expect purchases of raw materials to go down by 10%, currently for every unit sold, cost of purchase is 60%.
All purchases will be in credit.
They will also sell a fixed asset - land for 10,000 and deposit the money in cash.
Other payable for this period are 3000, rent and 4000, salaries. This will both go up by 25% after 6 months.
Make a base model, and a post 6 month model in order to arrive at the correct values.
Inventory Expenses
Purchases
getting any product / service etc.
Purchase
Sales
Purchase Return Day to day expenses
Sales Return Rent, Salaries etc.
Something you need to pay but havent paid
Model Parameters
x We are the owners of Reliance apparel - balance sheet currently only has Capital and Cash - each 1 L
x In the current period/ year (2021), you purchase items for 7 L, pay 10% in cash, and the rest in credit
x You also sell all of these items at a 10% margin - earning the entire amount in cash.
x At the end of the year, you purchase a further 10L of items, paying 50% cash, and the rest in credit.
x Next year (2022) you sell your entire inventory at 15% profit, entiry on credit.
x In 2022 total purchases are 25L, and you settle all of 2021's creditors balances. All of 2022's purchases are through credit.
x You sell all of 2022's purchases for 10% profit, and earn 70% in cash and the rest are balance as of the end of the year.
x In 2023, your purchases are 10% more than 2022, and the same cash: credit ratio is maintained.
x 2023 Sales are the same as the sales for 2022, and all in credit. 2022's debtors settle their balance in 2023.
x In 2024, all opening debit and creditors balances are settled.
x Prepare a Working Capital Model showing net working capital for 2021-2024. Do not make any further assumptions than what is alrea
Current Assets
Cash 1,300,000 2,095,000 3,320,000 820,000
Debtors - 1,225,000 2,750,000 -
Inventory 1,000,000 - - -
Total 2,300,000 3,320,000 6,070,000 820,000
Current Liabilities
Creditors 1,130,000 2,500,000 5,250,000 -
Total 1,130,000 2,500,000 5,250,000 -
Working Papers
Sales 770,000 - - - Value (Rs.)
Cash 770,000
Credit -
Total Cash
Opening 100,000 800,000 800,000 800,000
Cash Rec'd 770,000
Cash Paid 70,000
Closing 800,000 800,000 800,000 800,000
Total Debtors
Opening - - - -
Credit Sales -
Debtors Cash Rec'd -
Closing - - - -
Total Creditors
Opening - 630,000 630,000 630,000
Credit Purchases 700,000 - - -
Creditors Paid 70,000
Closing 630,000 630,000 630,000 630,000
Total Inventory
Opening - -70,000 -70,000 -70,000
Purchases Made 700,000 - - -
Sales Made 770,000 - - -
Closing -70,000 -70,000 -70,000 -70,000
THE END
Ratios and Financial Modelling
1 Liquidity Ratio
2 Leverage Ratio Leverage means debt!
3 Efficiency Ratio
4 Profitability Ratio
5 Market Value Ratio
These ratios can be used for different purposes - they are coming from different numbers!
They all come from our financial statements - but which parts of the financial statement is the question!
Liquidity Ratios
If acid test ratio is less than 1, and current ratio is greater than 1 - it means you are too dependent on inventories. Be careful!
Cash Ratio Current assets (minus everything except cash) ->Cash / Current Liabilities Current Assets = 10,000 not incl. i
Can cash ratio be greater than acid test ratio? NO! It has to be lower. Current Liabilities = 12,500
If Cash = Current Liabilities = 1
More cash than Current Liabilities >1 - which is good Ratio = 0.80 Not good
Less Cash than Current Liabilities <1 - which is bad
What is the difference between Cash ratio and operating cash flow ratio?
Operating Cash Flow = all cash related amounts you earned and paid etc for the current year!
Not considering opening cash balance!
Only looking at current years cash balance from sales minus expenses you paid etc.
It will tell you how many time of expenses you can pay out using operating cash flow.
Assume Operating Cash flow is 1L for the company that we are looking at.
What it means is - you can afford to pay out 8x the current liabilities with just operating cash flows.
Which means if current liabilities is 8x larger - 100,000 I can completely pay this with my operating cash flows.
I don’t have to invest or finance for these cash flows.
Larger the operating cash flow ratio, the better it is for the company!
Leverage Ratios
Debt Ratio = Total Liabilities Total Liab. Will include all liabilities
Total Assets Total Assets will include all assets.
We all want assets to be larger! So, assets are denominators - > and if denominator is larger, smaller the ratio, better it is for the company!
which means - for every rupee of assets you have, 46p is a liability you need to pay out!
So can we say what the free assets are?
0.54 p is free assets
Debt to Equity = Total Liabilities Total Liab. Will include all liabilities
Total Shareholders Equity Equity Capital + profits you made till date - losses you suffered till date (Sometimes called reserves and surplus)
it means for every rupee of capital, or equity you have in the business, how much liab is still in the business?
Net Reserves and Surplus 40,000 This is the amount you will see in the Balance Sheet.
This is the amount the shareholders have earned, but have not removed from the business -
they didn’t take any dividends
they didn’t take any salaries
etc.
Its like the total investment amount along with the initial capital
Total Liabilities 20,500 = 0.84
Total Shareholders Equity 24,500
It means, for every 1 Rupee I have left invested in the business, I have 84p of debt to be paid with that
You need to first pay all your debt - and this is paid through the 84p that you have invested in the company!
Interest Coverage Ratio = Total Operating Income = Sales - Expenses (EBIT) 16,000 2.13
Total Debt Service ( Interest Paid ) Interest Paid 7,500
It means I can afford to pay 2x the interest I am currently paying - so if my interest expense goes up another 2.13 times - I
will still be able to pay it without making a loss!
So - if the interest coverage ratio = 1, it means your operating income and interest paid are equal!
If interest coverage ration > 1, more operating income than interest paid - good!
If interest coverage ratio < 1, less operating income than interest paid - bad!
Efficiency Ratio
Asset Turnover Ratio = Net Sales If more numerator than denominator, more sales and less assets, ratio is hiher and therefore this company is really good!
Total avg assets If more denominator than numerator, more assets and less sales, this ratio is low and bad for the company!
50,000 1.11
45,000
Inventory Turnover Ratio = COGS How much was the cost of good sold, and how much is my avg inventory - how many times my companys inventory is
Avg Inventory replaced over a given period.
Starting inventory 1L
Increased to 1L 1L
Sold 2L -2L
Increased to 1L 1L
Sold 1L -1L
Increased to 1L 1L
Closing Inventory 1L
COGS +3L
THE END
Profitability Ratio
It measure the ability of a company to generate income with respect to the revenue it makes!
Let us take Amazon! And let us take our local kirana shop!
we have already seen the linkage between gross profit and net profit - the linkage between the gross p
What does High NP, but Low GP or Low NP and High GP mean? Analysis!
Remember -> gross profit is sales minus direct expenses (do not include indirect expenses) for diff between direct and indirect -> refer to t
Sales is net sales - total sales minut sales return!
It means for every rupee of revenue you make, you make 17p of net profits
Sales 1
Direct Expenses 0.36 36 p of direct expenses for every rupee of sales you make
GP 0.64
Indirect Expenses 0.47 47 p of indirect expenses for every rupee of sales you ma
NP 0.17
Operating Margin Ratio This is very similar to the gross profit ratio, only difference is that you take operating profit as numerator, and no
This will tell you how much profit you are making per rupee of assets you have!
This means that for every 1 Rupee of asset you have, you make 19 p of profit!
This will tell you how how much profit you make, for every rupee of shareholders equity that you have!
This is similar to the Debt: Equity, only difference is instead of debt you will be looking at Net Income: Eq
With every model you make, a lot of these ratios are derived - error in modelling means an error in the ratio itself!
THE END
Market Value Ratios
These ratios will tell you how your company is positioned in the market - as you value the company's shares or stocks!
BVPS 2.45
Attribution analysis for this value - find out how we can break this out
This is telling you per rupee of MV, how much dividend am I getting?
BVPS 2.45
Let us assume this company's shares are trading at the same MV as BV.
It means for every 1 rupee of share you own (MV), you get 2.04 rs as dividend!
you are basically doubling this money every year just through dividends!
Higher the yield, more cash, therefore better it is for the company!
This will tell you how much net profit you make for every share you own!
Higher the better, because it means you get more profits from owning shares!
Price to Earnings Ratio
This is one of the most important ratios when it comes to companys analysis!
And when we model - we have to set up a great model for PE ratio before we start!
Why?
This will determine whether the company is good or bad!
It means that for every 1 rupee of EPS, the shareholder will receive 2.88 rupees from the market!
The market will give you a premium of 1.88 rupees for every rupee you earn!
Is this efficient?
For example - if the industry PE ratio is 1.75, but the share you own is giving you a PE of 2.88, be a little wary!
this means my share is overvalued!
Therefore, sell it.
We will talk about these buy/ sell decisions a little later, but for now remember only one thing!
High PE ratio is not always good, low PE ratio is not always bad!
PE ratio is very important for you to source data from the market!
Conclusion and Common Errors
Conclusion - basically a list of points you need to remember whenever it comes to creating a model!
1 Financial Modelling is done by analysts, as well as people who want to express an opinion on the FS.
2 What is a model - basically drawing up present and future financial statements in order to see the path/ progress of a company!
3 You will get data from ledgers as well as different other sources of information - and you might have to use your own models.
4 All data is dependent on some other data! P/L is dependent on ledger, your B/s is dependent on ledgers - so no data is useless!
5 Some information is a byproduct of other information - for eg. Creditors are a byproduct of purchases and credit ratio!
6 When it comes to data, or modelling - make sure your basics are in place!
7 Data, data, data - either data is given to you, or you need to assume it yourself!
if it’s a predective model - make sure your assumptions are reasonable.
8 Never write off a business model using a one period model!
9 Control Checks - more is better than less.
10 understand how the end product is going to look, structure it accordingly.
" Easy to See, and Easier to Understand"
1 Cross Reference/ Circular Reference Error - this happens when two sets data are cross referencing each other, thus there is no final correct answer!
A B
1 1
2 2
3 3
4 4
5 5
#REF! #REF!
#REF! #REF!
How to resolve: You need to check which cells are causing the circular reference error, and make appropriate corrections!
No cell should be dependent on another cell for information!
2 ####### error
This happens when numbers in a particular cell are too big to fit into the cell's width
32,165,465,165,416,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000.00
This means the number is really too big to fit into the cell D40
This happens when a number is in the wrong format! It will be in log, or e^ formats, like the below -
3.21655E+58
This number format is basically telling us - there are 58 digits after the number expressed. Which means wee need to change the format in which it is expressed.
How to change the format: go to
Remember to hover over the cell that is giving you the problem when you do this!
4 #Name Error
(#NAME?)
This error comes up when the excel sheer is not able to recognize the text in the formula!
1
2
3
4
5
#NAME?
How to resolve: Make sure your formula is accurate - text in the formula is accurate!
1
2
3
4
5
15
5 VALUE Error - this comes up when the variables mentioned in the formula is wrong - what do you mean by variables? The cell references we mention in the formula!
1
2
3
4
sid
#VALUE!
How to avoid: In order to avoid this, make sure all the cell references are accurate, as well as relevant
6 #DIV?0! Error!
This error comes up when you ask something to divide by 0. Can we divide by 0? We cannot - so this error will majorly be a test with respect to Division by 0
For example -
500
0
#DIV/0!
But the answer is not accurate - the right answer is infinity! Remember 5th grade math?
7 NULL Error
For example
1
2
3
#ERROR!
In order to fix this: Make sure you put in the right arithmetic symbols -
1
2
3
6
+ sum(C55+D55)
NAME ERROR
NULL ERROR or VALUE Error
Null Error: arythmetic symbol issues
VALUE Error: Cell ref issues
8 REF error
If the data you are referencing is no longer presenting, a ref error comes up!
1
2
3
6 This is good
1
2
#REF! This is good
THE END
[1] Author:
Set of assumptions!