June 2, 2009 by financialmodel
What Our Financial Models Will Include
In this blog, we will be building financial models from the ground up. The financial models will serve as a generalized example that can be adapted to meet the needs of most businesses. Here are the key elements that the financial models will encompass:
- A Master Budget
- Consolidated Financial Statements: (1) Income Statement, (2) Cash Flow Statement, (3) Balance Sheet
- Free Cash Flow Analysis
- Sensitivity Analysis
- Contribution Margin Analysis
- Financial Ratios Analysis
- Valuation
- Capitalization Chart
Overview of the Master Budget
The master budget typically covers an operating period of one to five years, and can be considered a medium-term budget. The master budget is comprised of two key elements: (1) Operating budget, (2) Financial budget. In turn, the master budget drives the three key financial statements: (1) Income Statement, (2) Cash Flow Statement, (3) Balance Sheet. There are many additional ancillary statements that are produced from the master budget as well.
Operating Budget
The operating budget is intended to encompass the profitability of the business and consists of the following elements:
- Sales & Collections
- Cost of Goods Sold
- Inventory
- Operating Expenses
- Income statement
Financial Budget
The financial budget is intended to track large outlays of capital (i.e. capital expenditures), changes in the balance sheet and to track budgeted cash position. Here are the key elements:
- Capital Expenditures
- Cash Budget
- Balance Sheet
Tags: financial models, Master Budget
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May 9, 2009 by financialmodel
Please let us know if there are any topics that you would like for us to cover in this blog. You can post suggestions in the comments section. Or, you can contact us at david at financialmodel dot net.
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May 9, 2009 by financialmodel
I have experimented with articles on a wide range of topics over the past two months. We covered topics from valuing a Major League Baseball team to a financial model for a consulting organization. Beginning today, I am going to begin a multi-part discussion of how to model the financials for your start up business. At FinancialModel.net, this is the primary type of customer that we service. I want to give startup founders the tools that they need to do their own projections. Of course, if you need help along the way, we are always here for you.
The Purpose of the Financial Model
The purpose of a financial model is to quantify a company’s present, future and historical financial performance. At their core all financial models for startups will require an Income Statement, Cash Flow Statement, and Balance Sheet. Additionally, you will want the model to be driven by a central assumptions page.
What This Blog Will Cover
This blog series will describe all of the sections that you will want in your startup’s financial model. Also, as we go along, I will be posting an XL model that corresponds to all of the subjects that we have covered. Consider, this your Step-by-Step tutorial for building a financial model for your startup.
This Blog Will Cover Three Areas
1. Building the Master Budget
- The Operating Budget
- The Financial Budget
2. Building the Financial Statements
- Income Statement
- Balance Sheet
- Cash Flow Statement
3. Summarizing The Model
- Summary Methods & Techniques
- Valuation
- Capitalization
- Key Ratios & Analysis
Next Topic: The Master Budget
Tags: Balance Sheet, Cash Flow Statement, Financial Model Guide, financial modelling, Financial Statements, Income Statement, Master Budget, startup
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May 6, 2009 by financialmodel
Technorati, the search engine for blogs tracks more than 112.5 million blogs. While Web 1.0 was about information dissemination through internet, Web 2.0 is all about interaction and communication through internet beyond all limitations. Blogs provide an excellent way of many-to-many communication , that too of relevant content. Blogging has become a way of life and blogs such as the one that you are reading right now are becoming increasingly popular. How about a financial model for a blog?
Lets try to identify the sources of revenue for a blog. The revenue could be direct or indirect. The direct revenue comes only through advertisements. When the visitor clicks on targeted ads displayed on the sides and at the top/bottom of the webpages, the advertised companies usually pay a very small amount on a pay-per-click basis. Services such as Google Adsense facilitate this process. However the major benefit of a blog is its indirect revenue. Blogs can be used to improve the brand value of a business by providing a platform for interaction. This is why you see that every popular site has a blog built into it. In the virtual world, the chances of securing a customer is defined by the number of minutes you can make him stay in your website. Unfortunately this revenue is very difficult to measure.
Today there are very many free blog hosting services making it literally ‘costless’ to run a blog. The main costs are the ones incurred for securing content from the bloggers. Even this is almost zero for many blogs since visitors themselves create content. However the trick is in recognizing the opportunity costs. If someone is spending time blogging, his costs need to be measured on the basis that he could have spend those ‘blogging’ hours doing something else. Unfortunately our accounting conventions do not recognize opportunity costs. So quite funnily, financial modeling for highly interactive activities like blogging need to evolve further as there are no hard costs and revenues even though millions of users together spend millions of hours on them.
You can read about financial modeling in detail by visiting our website http://www.financialmodel.net .
Tags: Adsense, advertisements, blog, blogger, drect revenue, Financial Model, google, hosting, indirect revenue, pay-per-click, technorati, visitors
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May 4, 2009 by financialmodel
New York may have lost a lot of pride with the collapse of popular banks. But, when it comes to sports, New York rules! We are talking about the sports business. Yankees hit a huge home run in 2008 with a valuation of $1.5 billionThe . Mets are worth a little over $912 million. Elsewhere, Knicks hit a slam dunk with a top-of-the-list value of $613 million. What do you call something that’s worth $5.82 billion a year? a ’sport’? This is just the direct revenues of all 30 franchisees of MLB put together. Valuation of sports franchisees may appear to be very different from valuing oil companies and technology companies. When Benjamin Graham expanded and popularized fundamental valuation techniques, he may not have had a sports team in mind. But the fundamental valuation techniques are the same for all businesses. Project future earnings and discount them!
A Sports franchise usually makes money from three sources. The most important is the television revenue. The teams draw millions of dollars from selling television broadcast rights of their matches along with TV advertisements and endorsements. The best part about this revenue is that it comes with very little expenditure attached. The stadium revenue source is also good but it does have a lot of maintenance costs associated with it. Stadium incomes are through ticket sales, advertisements, suites etc., The real value of a sport brand is derived from the sale of merchandise branded in its name. The caps, t-shirts, shoes, other sports goods and video games rake in hundreds of millions for the major teams. The licensed goods are a great business in that on one hand they bring in cash revenue and on the other hand, they increase the intangible brand value of the franchise. A fan wears a Yankee cap as he perceives the brand to be ’strong’ and because he wears the cap, the brand gets stronger!
The biggest expenditure of sports franchise are the payouts made to the players, coaches, managers and the other staff. Besides, they also have to spend for the maintenance and upkeep of the stadiums and training facilities. An easy way to value a franchise is to break it down into different businesses that it is engaged in. If you want to know more the interesting world of financial modeling, please visit http://www.financialmodel.net .
Tags: advertisements, endorsements, financial models, Franchise, knicks, maintenance, merchandise, mets, sports, sports franchise, stadium, suites, ticket sales, TV, valuation, video games, yankees
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April 29, 2009 by financialmodel
‘Recession’ and ‘Crisis’ are the most common words in speeches and writings everywhere nowadays. Almost every person and every business appear to have been affected to some extent by the ongoing problems in the economy. However there are businesses which are affected the least during economic slowdowns. Education is one such industry. When we are sure to be fired from job very soon, why not go back to school, get a new degree and find a better job? The opportunity cost of going back to school is the least at times like these. Many view this as an optimal time to invest in their human capital.
While some educational institutions are run as trusts and not-for-profit organizations, education has evolved into a profitable business in developed countries. Education is like any other business and requires detailed financial models to project the future in numbers. Financial modeling for educational institutions is simpler than for many other businesses. The prime and in most case, the only source of revenue for schools and colleges is fees collected from students. In the case of larger institutions, there can be an endowment which contributes to annual operating expenses as well.
An educational financial model should classify expenses into hard infrastructure and soft infrastructure costs. Hard infrastructure costs include the costs incurred for leasing / buying land and buildings, transportation vehicles, electronic equipments etc., Soft infrastructure costs include academic costs incurred as salaries to academic staff, research expenses, library expenses etc. The various facilities in a school may be identified separately and fees are collected for each facility. This way, each one of them can be run profitably. For example, the rooming fees collected is enough to cover all living related expenses while the sports fee is adequate to provide for maintenance of courts, instructors’ salaries, gym expenses etc. The financial model should identify each one of such facilities and revenue and expenses should be projected.
If you want to know more about financial modeling or want to get financial models built for your business you may visit http://www.financialmodel.net/
Tags: academic budgeting, academic fees, academic financial model, colleges, educational institutions, facilities, fees, financial modeling, financial models, hostel fees, recession, schools
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April 28, 2009 by financialmodel
This is an era of multi-national companies. Almost every business wants to go beyond the boundaries of the nation and explore the market in unknown and unfamiliar economies. The proliferation of the internet medium means that the supplier from one corner of the world can easily reach and market his goods to a customer in another corner. While expanding beyond the restrictions of the domestic borders may bring in rich rewards, the rewards are not without risks. One of the major risks faced by a business operating in multiple countries is foreign exchange risk. Even businesses which operate in one country but import raw materials from or export finished goods to another country also face foreign exchange risk. The volatility in currency exchange rates has increased significantly during the on-going financial crisis and managing foreign exchange risk has attracted a higher level of significance. Financial Models need to account for this risk.
Assumptions related to foreign exchange rates form an important part of financial modeling for such businesses. These assumptions are usually made based on the historic exchange rates for about 5-10 years. While this method may be useful during normal periods, they may prove disastrous to the model during periods of heightened volatility. Another method would be to assume a base rate close to the market rate under the assumption that the company would engage in active or dynamic hedging. While almost all businesses do some kind of hedging, most of them do not cover all of their foreign exchange risk. While the decision to hedge or not to hedge is left to the business-owner / directors to make, the financial modeler should ensure that the models reflect the actual policy to be put to practice.
You can research more on <a href=”http://www.financialmodel.net”>financial models</a> here.
Tags: currency exchange rate, financial models, foreign exchange model, foreign exchange rate, forex, fx, hedging, historic exchange rate, multi-national company, risk, volatility
Posted in Financial Modeling Technique | 1 Comment »
April 27, 2009 by financialmodel
We have been talking and hearing about how the world may soon run out of fuel if we continue to consume petroleum fuel at the same rate as now. It is because petroleum is formed from fossils that got deposited inside the earth millions of years ago. That’s why petroleum based fuel is called ‘fossil fuel’. Many companies today have set up plants to manufacture diesel from sources such as plants, organic waste, bio-mass etc., This kind of fuel is called ‘Biodiesel’. Once considered a ’sun-rise’ industry when crude oil price was cruising to $147, the bio-diesel manufacturing is now sailing against headwinds with the the pull-back in crude oil price and mushrooming of manufacturers. However, because of the long-term profitability and government concessions & tax benefits many businessmen are setting up new biodiesel plants with expectations for future increase in price.
Financial models of biodiesel plants should take into account three major costs – input cost (feedstock cost), operating and maintenance cost and capital cost. Biodiesel manufacturing involves significant investments in factory land and machinery. The cost of this capital outlay should be accounted for along with depreciation on machinery. Note that these costs should be factored in when coming up with an all-in cost per gallon of fuel manufactured. Operating costs are the cost of direct labor required to run the plant as well as input feedstock, and energy required to run the plant. Maintenance costs are related to the maintenance of plant and machinery in prime condition. These costs remain almost the same even if the plant is not utilized at its full capacity. Input costs form a major part of the total costs. There are a wide variety of inputs from which bio-diesel can be extracted. Almost all vegetables that contain starch (example, Jetropha, Soya, Sugarcane etc.,) can be used as inputs and the cost of final product is determined by the cost of input. Vegetable oils are processed into Biodiesel. Therefore it needs to be seen if the plant also includes a crushing plant or buys vegetable oils directly from the market. Raw material cost may also include transportation and costs associated with imports & foreign exchange since its normal for biodiesel plants to import at least a portion of their raw material from South American and Asian countries. Biodiesel is usually blended with petroleum based fuel in the varying ratios in order to avail of tax benefits. The manufacturer may sell biodiesel to petroleum distribution companies who in turn supply to gas/fuel stations or the manufacturer may market it directly to the fuel/gas stations.
At FinancialModel.net, we have been building financial models for a number of algae biofuel and electricty plants over the past years. You can read more about the services our company offers on our website http://www.financialmodel.net/.
Tags: algae, algae fuel, bio-mass, biodiesel, biofuel financial model, crude oil, crushing maintenance cost, depreciation, fossil fuel, import cost, import duty, jetropha, machinery, organic waste, plants, soya, sugarcane, vegetable oil
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April 22, 2009 by financialmodel
We saw the critical aspects of financial modeling for trading business. Traders may also conduct business across the borders of the country in which case, it is called an import/export (impex) business. In financial economics, these impex businessmen perform a very crucial function of eradicating international price arbitrages. While these businesses face more regulations in the form of import licenses, customs duties etc., the business model is akin to that of a simple trader. However there are some unique features that prop up while building financial models for these businesses.
Impex businesses deal in multiple currencies. Even though the USD is considered the de-facto currency for international trading, sometime a big seller may demand payment in his local currency. With the volatility in currency market hitting the roof nowadays, even Swiss Franc isn’t considered safe anymore. Therefore it becomes imperative to deal with currency risks by way of hedging. The financial model should make assumptions about currency exchange rates, hedging policies and hedging costs. The importers usually do not pay for the goods upfront. In fact they don’t pay cash at all. Instead they pay by a Letter of Credit (L/C) by which the importer’s bank agrees to pay the invoice amount to the exporter. In order to provide this facility to the importer, his bank may charge some commission and interest on the amount outstanding. These costs need to be incorporated into the financial model since they could be substantial for a company actively engaged in importing. Usually the exporters quote prices on a CIF basis which includes the Cost, Insurance and Freight for the consignment till a major port in the importer’s country. However the importer has to pay for the domestic transportation within his country. This cost is usually passed on to the final buyers else the profit margins would get a beating.
You can visit http://www.financialmodel.net/ to get professional assistance in building financial mprojections odels for your own business.
Tags: arbitrage, bank, CIF, cost, currency risk, export, financial models, freight, impex, import, insurance, L/C, letter of credit, profit margin, swiss franc, USD, volatility
Posted in Financial Modeling Technique, Industry, overview | 2 Comments »
