Financial Modeling In a Nutshell

Financial Modeling Guide with Free Excel Model Sample

by Vladimir Baydin Ph.D. MB
MBA Candidate | Private Equity | Venture Capital | Financial Modelling | StrategFollow 29

45 reviews2,044 views|Start the discussion!|Bookmark download for free

Description
A step-by-step guide on how to design and structure a Financial Model, including Scenario Analysis and Valuation.

I remember the first model I built in 2005. It was awful: terrible design, bad structure, calculations’ drawbacks, etc. Since that time I have made dozens of different models. There were one-page high-level models, “normal,” and complicated multi-scenario fully automated ones. They were used by large
corporations, start-ups, Private Equity Funds, and Investment companies. I have learned something since 2005 and wish to share some insights into financial modelling.

The financial model can be viewed as an attempt to forecast future business dynamics. It serves the goal of evaluating investment project or the whole firm.
The most common approach to doing it is to forecast Free Cash Flow (FCF). Quick remind - there are three different types of FCF: Free Cash Flow to Firm (Project), Free Cash Flow to Equity, and Cash Flow to Lenders, which is simply principal repayment.

Model Features:
1. Two scenarios tied to the prospective growth rate of business;
2. Growth rate reflects Occupancy rate of rooms;
3. Revenue is divided into three business segments: Rooms, Restaurant, and Other Services;
4. Costs include COGS, SG&A, Interest, and Depreciation;
5. Debt Repayment is based on annuity;
6. Two types of CAPEX: rooms-related and management software purchase;
7. Option to calculate results with or without potential acquisition;
8. Interest rate increases in case of acquisition due to increased default risk;
9. Two WACC calculation: based on firm's data and industry average;
10.Target's EBITDA normalization is based on Target's owner salary. The underlying assumption is that this expense will no longer exist after the
acquisition.

- Vladimir Baydin, PhD

This Best Practice includes
1 Word Document, 1 Excel Model Sample