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Corporate Modelling Apr 18, 20231
Spreadsheet Conventions for Financial Models
Caution: You do not always have to conform to these conventions – Foolish consistency is the hobgoblin of a petty mind
Corporate Modeling Apr 18, 20232
Model Layout and Structure
• If somebody else picks up your model, can they easily verify that the model is correct.
If other people cannot work through your model and understand it in a couple of hours, there is a problem
• When you pick up your model after not using it for a couple of months, can you replicate and explain it.
If you start sweating when you think about opening the model, there is a problem.
Corporate Modeling Apr 18, 20233
Layout and Review
• If you are reviewing a model, you would like:
To see what the inputs to the model are (you do not want to search around spreadsheets to find the model results).
To be able to quickly understand calculations in the model.
To be comfortable that the model does not have errors.
To add calculations of added revenue and expense, deferred debits and other components to the model (add rows to template models).
To supplement the model with additional time periods (add columns to template models).
To be able to perform sensitivity analysis, scenario analysis and Monte Carlo simulation
Re-use the model in future years.
Corporate Modeling Apr 18, 20234
Objectives of a Well Designed Model
• A well structured model:
Should be flexible (easy to change formulas, model delays, added expense items, alternative forecast horizons, different assumptions)
Should be presentable and transparent in a way that is convincing to readers of the model that it is accurate
Should allow risk analysis with sensitivity analysis, scenario analysis, break-even analysis and Monte Carlo simulation
Should model alternative decisions (investment, lending, contracting, selling)
Should effectively present results where the key drivers and the key outputs are clearly demonstrated
Should be accurate as demonstrated by balancing accounts, extreme scenarios and other tests
Should be stable where macros, range names or circularity do not create errors in the model
Corporate Modeling Apr 18, 20235
Programming, Accounting and Engineering
• Using excel with if statements, combo boxes, range names, look-up tables, macros and switch variables is a necessary, but easy to learn skill
• Construction of a basic financial model requires knowledge of accounting principles -- cash flow, depreciation, balance sheets and financial ratios
• Working through value drivers requires knowledge of how the business process – what drives value, how the cost components are developed and how the production process is modeled …
• Effective Modeling
Mechanics and Accounting 25%
Assumptions and Value Drivers 45%
Presentation 15%
Auditing 15%
Corporate Modeling Apr 18, 20236
Spreadsheet Organisation and Conventions
• Organization:
Model drivers and cash flows should be clearly laid out
Inputs should have a different colour (Colour and then Move)
Periods in different sheets should correspond to the same column
• Simple Formulas
Use max and min instead of if statement
Financial statements should only have simple formulas
• Financial Calculations
Positive number convention
Use switches and cork-screws
• Excel Tools
Named ranges may be appropriate for variables which have a single value such as the life of the plant
Try to avoid circular references
Describe column titles and macros in detail
Corporate Modeling Apr 18, 20238
Model Organization
• Clear progression of inputs and assumptions to outputs
• Use of the Financial Model as a Database
• Presentation of assumptions that drive value
• Organization of sheets in financial statements with inputs, workings, financial statements and outputs
• Table of Contents and Settings
• Necessary and unnecessary complexity
Corporate Modeling Apr 18, 20239
Do Not Make Important Inputs Difficult to Find and Adjust
• The key drivers should be easy to change and should be easy to find
All inputs should be in one or a few sheets and should be coloured
Don’t put the key inputs in sheets that are far from the beginning
The inputs should be easy to change (use combo boxes or spinner boxes so the inputs can be changed from more than one sheet)
Corporate Modeling Apr 18, 202310
Example of Spreadsheet Organisation and Database of Financial Information
• There is no set rule for organising spreadsheets. But the following list provides and example of how a financial model is a database of financial information on the value of a company.
Historic Financials
Assumption Book
Revenue Working
Operating Cost Working
Other Working
Aggregation
Financial Statements
Financial Ratios
Valuation
Graphs
Input Back-up
Background Sheets
Virtually all of the information that drives the value of a company can be found somewhere in the model.
Corporate Modeling Apr 18, 202311
MODEL ORGANISATION: Meaning of Colours in Inputs and Outputs
• Colorus should mean something that makes the spreadsheet easier to follow
Inputs in a color
Links to another sheet
Links from another sheet
Key outputs
• Don’t Simply Colour to Make the Spreadsheet Pretty!
• “Formulas should not bounce from sheet to sheet without clear direction” Collect items earlier sheets at the top of subsequent sheets.
Corporate Modeling Apr 18, 202312
Example of Moving Between Sheets
Colors correspond
to sheet names
Macro named spreadsheet colors all sheets will perform this function automatically
Corporate Modeling Apr 18, 202313
Colors Should Mean Something
There are yellow, red, blue and black codes.
There is no documentation of what the colors mean
Corporate Modeling Apr 18, 202314
Example of Non-transparent Model – No Idea where projections come from
What is the value
What drives value (sales, ROIC, etc.)
What are inputs and what are formulas
Corporate Modeling Apr 18, 202315
Sheet Organization and Table of Contents
• PUT THINGS IN ORDER!• Investment banks like many sheets so that you can see
the components of each page
Many sheets can be easy to to print
• Each sheet prints as page
• Too many sheets can make the links difficult to follow
No clear rule on the number of sheets
The sheets should be organized in a logical order
• Input sheets
• Working Sheets
• Financial Statements, etc
For consolidation in mergers, keep at least all financials on the same page
Too Many Sheets, Not Organized
Use the Table of Contents Macro Provided on the CD
Corporate Modelling Apr 18, 202316
Model Organisation: Make Inputs Easy to Find and Calculations Easy to Follow
Corporate Modeling Apr 18, 202317
Making Calculations Easy to Follow
• Inputs should be on a single sheet
• Drivers should be gathered together
• Show outputs next to inputs to make sure the model is working using combo boxes, spinner boxes and scenario titles
• Repeat combo boxes in different sheets and key outputs in different sheets whilst developing the model
• Don’t over-use fancy excel formulas and excel functions when you could solve the same problem with a simple function
• Present the formula components so that the trace precedent and trace dependent can be used
Corporate Modeling Apr 18, 202318
When Presenting Financial Ratios, Present the Numerator and the Denominator
• The numerator and the denominator are shown so that the reader can see precisely how the calculation is made.
Corporate Modeling Apr 18, 202319
Use Data Tables with Row Incidies to Describe when Values Occur
• Show the explicit value so one does not have to guess what cell the value goes into.
One does not know when the long-term and when the short-term occurs
Corrected Case – Use a table with the year specified
Corporate Modeling Apr 18, 202320
See the Results of Inputs and Outputs on the Same Page – Keep key results and inputs in sight using Boxes
• Often, a spreadsheet will have settings for valuation methods, covenants, interest rate methods and so forth. It is nice to see the how the results vary when inputs change, even though the inputs should still be on one page. In the example below, the sensitivity factors are shown along with the graph and the IRR’s, so that you can see what happens when you change the factor.
While working on a model, keep key results in sight.
This can be done with spinner boxes and combo boxes
When you use boxes to test sensitivity analyses and to develop risk analysis, make a macro that re-sets the assumption to base case values
Corporate Modeling Apr 18, 202322
SPREADSHEET CONVENTION: Setting-Up Sheets with Indentation Columns
• Add Three or Four Narrow Columns at the beginning of the sheet
• Make a long column for the name of the row
• Add a column for units
• Add a column for formula definition
• Make all time periods start in the same column in different sheets
Corporate Modeling Apr 18, 202323
Formatting
• Use rules from accountants
Rule of lines
Coding of Accounts
Double Entry
• Use grouping instead of hiding rows or columns. This can be done by holding the SHIFT, ALT, keys.
• Title accounts as either detailed, or total and use the auto filter selection from the data option.
Corporate Modeling Apr 18, 202324
Effective Use of Comments
• While using comments is obvious, using comments that describe what a spreadsheet does can be very effective. I suggest using a comment in the A1 cell of each sheet as illustrated below.
A comment in A1 that describes what the sheet does is a pain, but it is worth it later on and it forces each sheet to be organised.
Note how you can format the comment and make it like a help screen
Corporate Modeling Apr 18, 202326
SPREADSHEET CONVENTION: Formulas Should Be the Same Across Columns
• If you repeat a column, it should not change the spreadsheet
• You can use switches to keep the formulas the same for historic and future periods
• An exception is the construction period in project finance models
• “A well build model will use the same formulas for historic and forecasted periods without any modification
Corporate Modeling Apr 18, 202327
SPREADSHEET CONVENTION: Formulas Should Be the Same Across Columns
• Example: If 2008 is column “H” in the input sheet, 2008 should also be column “H” in other sheets such as the financial statements.
Corporate Modeling Apr 18, 202328
Formulas Not the Same Because of Blanks
If you insert a column or change the life of an asset, the blank columns will not automatically adjust
Corporate Modeling Apr 18, 202329
SPREADSHEET CONVENTION: Keep Row Spacing Consistent for Aggregation
• A painful part of modelling is aggregating debt issues. To make this less painful and less subject to problems, keep the spacing the same for different issues as shown below.
Issue 1 and Issue 2 have the same format so that aggregation is much easier
Corporate Modeling Apr 18, 202330
Problems with Inserting Columns – Vlookup and Macros
• Say you have used a look-up table with an index value, a table and where the column selected is defined in the vlookup function. If you insert a column between the vertical index of the look-up table and the column defined in the look-up table, the results of the look-up table will change.
• Notice that inserting a column changed the result
• A better way is to combine match and index functions
• When using match and index, first show the result of the match statement and show the result of the index somewhere on the sheet. Then use the index.
Notice the different result of the look-up table
The match and index command is more flexible (allows sorting from low to high)
Corporate Modeling Apr 18, 202331
Example of Inconsistent Periods
Where there are inconsistent periods,Financial ratios and returns are moredifficult.
Corporate Modeling Apr 18, 202332
Corrected Approach with Replacement and Retirement
Automatically retires and replaces assets
Instead of blanks, this sheet has formulas with zeros.
Corporate Modeling Apr 18, 202333
SPREADSHEET CONVENTION: Labels should be Consistent, Concise and Have Similar Names
• Choose names that are as concise as possible. Names greater than 10-15 characters become cumbersome to type and more prone to errors.
Fleet Proforma
747-200FMD-11 MD-11MD-11F MD-11FA340 A340A300-600R A300-600RA319 A319A320 A320-200A321 A321B737-200/300/700B737-300MD-82 MD-82MD-90 MD-90Regional jets Regional jetsOther-TU204 OtherCRJ
Note difference in the way 737’s are defined and no
definition of 747 in second column. This makes use of look up tables very difficult
Corporate Modeling Apr 18, 202334
SPREADSHEET CONVENTION: Repeating Inputs to Make Calculations Clear to Readers
• In Order to Keep Formulas Simple, it can be beneficial to repeat the inputs
Inputs are near the formula
Inputs are also in a separate sheet allowing for value drivers etc.
Corporate Modeling Apr 18, 202336
SPREADSHEET CONVENTION: Keep Formulas as Simple as Possible
• Keep formulas simple
Separate complex formulas into components
Document the flow of the formulas
• Manager should be able to read the printouts and understand the model
• Show the formula computations in a cell
Make the presentation transparent by showing components near the formula
Formulas should not extend past the formula box
The longer the formula, the likelier it is that a sign could be reversed when calculating things such as interest expense and interest income.
Corporate Modeling Apr 18, 202337
Keeping Formulas Simple
• When you first program a sheet, the formulas are often too complicated
• This occurs when you add features to a spreadsheet
• Sometimes there are macros when the computations can be accomplished in other ways.
• It is easier to add classes for different types of plant, sales, etc., than to try an interpolate.
• Bad Cell Risk
When working in a team environment, it is advisable to assign one person to be responsible for the master spreadsheet and for making all changes and updates.
Corporate Modeling Apr 18, 202338
• In reviewing a model, it is a lot easier to audit relatively simple formulas.
Show revenues, expenses and capital expenditures separately
Present the financial statements
Compute various outputs
• Complex models with range names, macros, long “if” statements, numerous sheets can be difficult to review
• Don’t try to do multiple things in one section of the spreadsheet
Try not to Make the Models and Formulas too Complex
Corporate Modeling Apr 18, 202339
Example of Too Complex Formulas
When formulas are this long, it is very difficult to audit them
Corporate Modeling Apr 18, 202340
Use of ALT-ENTER to Layout complex Formulas
• If you cannot avoid complex formulas, you can use the ALT-ENTER command to lay-out a complex formula and make the components easier to read.
Putting the formula on different lines can make a long formula somewhat easier to read.
The ALT,ENTER creates a line break.
Corporate Modeling Apr 18, 202341
Example of Complex Formula
If Statement and Difficult to Follow Look-up tables
Corporate Modeling Apr 18, 202342
Documented Lookup Table
Look-up table inputs are near the look-up table and are illustrated, range names are used
Corporate Modeling Apr 18, 202343
Simplified Formula
Formula is still a little complex, but it is illustrated from lines above and it is documented with range names
Corporate Modeling Apr 18, 202344
Try Not to Use Too Many Excel Functions
• Excel functions can be very helpful, but they can cause confusion if people reading the model don’t have the same background as you.
Corporate Modeling Apr 18, 202345
More Readable Excel
• The following example still uses the excel commands, but at a bit more understandable
Corporate Modeling Apr 18, 202346
Example of Non-Transparent Calculation
0 1 2 3 4 5
Colocation revenueTotal Area allocated to colocation 5,000 5,000 5,000 5,000 5,000 5,000 Rate per Sq Ft (indicative) 2,800 980 1,400 1,960 2,240 2,520 Number of Racks 700 700 700 700 700 700 Rate per Rack 20,000 20,000 20,000 20,000 20,000 20,000
Occupancy 100% 35% 50% 70% 80% 90%
Colocation revenue 4,900,000 7,000,000 9,800,000 11,200,000 12,600,000
Year
You do not know which Rate is the driver of revenues.
You do not know whether to change one year or multiple years
Calculations are not in logical order
Which quantities and prices determine
the revenues of 20,000 – You need to know
which one drives the revenues
Corporate Modeling Apr 18, 202347
Improved Sheet with Logical Order and Coded Inputs
0 1 2 3 4 5
Colocation revenueNumber of Racks No 700 700 700 700 700 700 Rate per Rack AED 20,000 20,000 20,000 20,000 20,000 20,000 Occupancy Pct 100% 35% 50% 70% 80% 90%
Colocation revenue 4,900,000 7,000,000 9,800,000 11,200,000 12,600,000
Total Area allocated to colocation Sq Ft 5,000 5,000 5,000 5,000 5,000 5,000 AverageRate per Sq Ft (indicative) AED 2,800 980 1,400 1,960 2,240 2,520 2,800
Managed services revenueNumber of Racks No 100 100 100 100 100 100 Rate per Rack AED 200,000 200,000 200,000 200,000 200,000 200,000 Occupancy Pct 100% 5% 10% 15% 20% 30%
Managed services revenue 1,000,000 2,000,000 3,000,000 4,000,000 6,000,000
Total Area allocated to managed services Sq Ft 1,000 1,000 1,000 1,000 1,000 1,000 AverageRate per Sq Ft (indicative) AED 20,000 1,000 2,000 3,000 4,000 6,000 11,400
Total RevenuesColocation revenue AED 4,900,000 7,000,000 9,800,000 11,200,000 12,600,000 Managed services revenue AED 1,000,000 2,000,000 3,000,000 4,000,000 6,000,000
Total Revenue AED 5,900,000 9,000,000 12,800,000 15,200,000 18,600,000
Year
- Inputs in a different colour- Sheet in a different colour- Add indents and units- Move to first sheet- Re-order so can see how calculations are made
Indents
Re-order to show calculation process
Corporate Modeling Apr 18, 202348
Example of Long Formulas and Other Problems
• There are a couple of problems here
Formula Difficult to Follow and Too Long
Inputs should be in color
Formulas with blanks
Corporate Modeling Apr 18, 202349
Multiple Links from the Same Source
• If you are re-using a number from an initial source, link to the original number in the source rather than using links to the prior link. This enables the trace precedent and trace dependent keys to be used more effectively.
With direct links to the source instead of indirect links, the dependent functions work more efficiently
Before you delete a number, use the trace dependent function
Corporate Modeling Apr 18, 202350
Use of Arrows for Auditing
• Some people believe strongly in using the precedent and dependent arrows. For example, before deleting a cell, check whether it is a dependent for other cells.
• You can also use the CNTL, [ and the CNTL, ] key stroke sequence.
• In the example below, the trace dependent shows that deleting a cell will cause problems
Notice the trace dependent buttons are shown on the excel bar
Use the trace dependent and make sure nothing depends on the cell before deleting a cell.
Corporate Modeling Apr 18, 202351
Put Things in Correct Order in Cash Flow Waterfall
• Modeling a cash flow waterfall can be complex
Defaulted debt
Covenants
Debt Service Reserves
• Show details of minimum and maximum tests
• Put the waterfall in logical order
• Make calculations refer to lines above, if possible
Corporate Modeling Apr 18, 202352
Waterfall Example
• The example below illustrates the model of a cash flow waterfall. Note that you should put the cash balance back into the waterfall and then subtract it at the end of the waterfall.
Corporate Modeling Apr 18, 202353
Illustration of Problems with Formatting of Waterfall
This example shows a typical example of a cash flow page that does not order the waterfall. It is very difficult to determine the default probability on the loan without seeing the cash flow to each issue.
Corporate Modeling Apr 18, 202354
SPREADSHEET CONVENTION: Max, Min rather than If Statements
• When possible, use max or min statements rather than if statements
The max and min statements are easier to audit
• If statement
– If (EBT > 0, EBT x tax rate, 0)– Max(EBT x tax rate, 0)
The max and min are more difficult to think through, but much easier to audit later on
Corporate Modeling Apr 18, 202355
SPREADSHEET CONVENTION: Positive Number Convention
• In the financial statements, input all formulas as positive numbers, even if the item is a subtraction from net income or cash flow.
For example, even though capital expenditures and debt re-payments are a reduction in cash flow, the numbers should be positive and the totals should subtract the numbers
• This is helpful for audits and makes sub-totals and summations much simpler – you don’t have to remember whether to add or subtract the numbers.
• This does not mean that every number is positive (e.g. negative W.C.) The idea is that subtotals should be consistent with the logic of the calculation – e.g. capital expenditure is a subtraction from cash flow.
• When you use the positive number convention, show what is deducted and added to the total in the title of each row.
Corporate Modeling Apr 18, 202356
Example of Positive Number Convention
• In this example, the draws are added and the repayments are subtracted even though all numbers are shown as positive numbers.
Corporate Modeling Apr 18, 202357
SPREADSHEET CONVENTION: Model Switches
• Models often have switches
Switch for time periods
• Time period of explicit cash flows in valuation
• Time period for terminal value in valuation
• Construction period in project finance model
Tax carryforward methods
Interest Timing
Depreciation Methods
Dividend Methods
• Put the Switches Together and Make them Easy to Understand
• Use logical statements to create switches
Corporate Modeling Apr 18, 202358
Use Excel Conventions
• Excel Uses a Number of Conventions such as:
Logical Variables
• True = 1
• False = 0
Row first and Column Second
For example, in setting a switch from a question – make sure that true is 1.
For example, in reading in a table, use the row first and column second convention
Corporate Modeling Apr 18, 202359
Example of Using Switches
•The sheet below uses switches to define various calculations. The switches are part of the calculation where TRUE = 1 and FALSE = 0.
Corporate Modeling Apr 18, 202361
SPREADSHEET CONVENTION: Presentation and Use of Cork Screws
• Cork Screws involve:
Laying out the beginning and ending balance
Showing retirements and new additions
Beginning balance = ending balance from previous period
Ending balance = Beginning balance + Additions - Deductions
Cork screws are useful for balance sheet accounts and capacity balance
• LIFO Inventories
• Number of Planes by Type
• Debt issues and cash reserves
Corporate Modeling Apr 18, 202362
Example of Problems without Cork Screws – Cannot See Flow of Capacity
Corporate Modeling Apr 18, 202363
Corrected with Cork Screws
Clearly lay out the beginning balance and the ending balance
Corporate Modeling Apr 18, 202364
Use of Cork Screws
Beginning Balance of current year is the ending balance of the last
year
Corporate Modeling Apr 18, 202365
SPREADSHEET CONVENTION: Show units in working calculation
• You should show the units in each calculation where the production portion of the spreadsheet is developed. The use of units is illustrated below:
Show the units in a separate column
Corporate Modeling Apr 18, 202367
SPREADSHEET CONVENTION: Appropriate Use of Range Names
• Some suggest that each cell in a spreadsheet should be named for documentation.
• Problems with Range Names
Cannot trace the calculations
Models become unstable
Difficult to add to models
• Benefits of Range Names
Macros
Look-up Tables
Switches
Combo Boxes
Corporate Modeling Apr 18, 202368
Moving Between Sheets
• Given the number of sheets in a financial model, it is important to keep track of where the numbers come from:
Mark which rows are to be transferred to another sheet
• Use one color for rows that are to be transferred out
• Use another color for rows that are transferred in
• Transfer Inputs at the top of the page
If you are using range names, then use a range name code for each sheet
• E.g.
– INPUT_tax_rate– WORKING_Revenue
End of the code is the sheet where the range name is located
Corporate Modeling Apr 18, 202369
Range Name Conventions
• Document name of the range in the spreadsheet
• Can color named ranges
• Clean-up range names
• Use range names in macros
Corporate Modeling Apr 18, 202370
Use of Named Ranges
• Some people believe every range should be named in the spreadsheet
• A convention is to name every variable in the sheet with the same prefix
• You cannot have spaces in named ranges
• Find named ranges with the Insert, Name, Define Command in Excel
• If you are using a range name, show the name of the cell, row, column or table in the spreadsheet so it is easy to see where the range name is located.
Corporate Modeling Apr 18, 202372
Problem with Range Names – Delete a Name and You Get Errors
Name Box
Corporate Modeling Apr 18, 202373
SPREADSHEET CONVENTION: Circular Reference Problems
• Circular Reference Solutions
Use the Iteration Check Mark on the Options, Calculations menu
Use macro to work through equations
Compute the equations
• Problems with iteration
Cannot use the undo key
Goal seek does not work
Model is unstable
Corporate Modelling Apr 18, 202374
Spreadsheet Convention: Keep Top of Sheets in Same Format when Working with Multiple Sheets
Corporate Modeling Apr 18, 202375
Consolidating Sheets
• With multiple assets it is sometimes more effective to work with multiple sheets rather than a single sheet.
Keep track of the age of each plant
Measure the real costs by the age of the plant and then inflate the real costs later
If you are copying the same sheet, do not use range names!
Corporate Modeling Apr 18, 202377
Show the Age and the Number of Operating Days Explicitly in the Model
• A difficult problem in models is coming up with start dates and end dates
This can become complex if the project begins in the middle of a year.
Use switches, cork screws and many rows to model the beginning date and ending date
Corporate Modeling Apr 18, 202379
SPREADSHEET CONVENTION: Do not force different inputs to be the same
• Example:
Book life and economic life
Book depreciation and tax depreciation
Corporate Modeling Apr 18, 202380
Macros
• Keep Complex Macros to Minimum
• Use Range Names in Macros
Otherwise cannot insert or delete columns and rows
Makes documentation of macro more straightforward
• Uses of Macros
Sensitivity analysis
Goal seek (although can use solver)
Corporate Modeling Apr 18, 202381
Location of Macros
• Create a button for macros
• Keep the macros in separate sheet
• Keep programs in the same module
• Put functions between programs so they can be found
Corporate Modeling Apr 18, 202382
Documentation of Macros
• It is good to explain exactly what the macro does and use excerpts from word or from power point to explain the process
Insert documentation by creating a word document and copying and then pasting special into a spreadsheet.
Corporate Modeling Apr 18, 202384
Model Checks
• Standard and Poor’s
Simple checks can go a long way to limit errors
Always keep the operating margin (EBITDA/Sales) in sight
• McKinsey
If the ROIC exceeds WACC, then the market value should be more than book value
Steady state growth should occur when the terminal period is reached
Check valuation with the multiples
• For Project Finance Models
Keep IRR’s, cash flows and DSCR’s in sight
Project IRR should equal Equity IRR with no debt
Corporate Modeling Apr 18, 202385
Documentation of Models
• Document the models with comments, descriptions, range names, or columns.
• Think about titles of columns and make them as descriptive as possible.
• Include the units on all the columns.
• It would be good to place comments in each line of a model to describe the source of data and the calculation.
Date 06/26/03 Total Generation 3,393.00 Hour 1000 Actual System LambdaHour Number 1017 Thursday PeakWeekday 5 Weekday Mkt Pr 69.35$
Capacity Not Dispatched
(MW)
Cumulative Capacity Available
(MW)
Variable Cost
($/MWH)
Cumulative PI OW Load and Transmission
Generation for UP in Intact
Case (1)
Remaining Available Capacity
Remaining Cumulative
CapacityBase Capacity
(MW)Presque Island Analysis Base - Actual Sum of prior Unit Cost sht Fill w/ low cost
Presque Isle 9 3.00 3.00 14.15$ 3.00 3.00 - - 80.00 6/22/2003 80.00 Presque Isle 7 7.00 10.00 14.36$ 10.00 7.00 - - 80.00 6/12/2003 80.00 Presque Isle 8 5.00 15.00 14.35$ 15.00 5.00 - - 80.00 6/9/2003 80.00 Presque Isle 6 (2.00) 13.00 18.83$ 13.00 (2.00) - - 80.00 6/25/2003 80.00 Presque Isle 4 2.00 15.00 19.12$ 15.00 2.00 - - 50.00 6/10/2003 50.00 Presque Isle 5 5.00 20.00 19.07$ 20.00 5.00 - - 80.00 6/8/2003 80.00 Presque Isle 3 - 20.00 19.63$ 20.00 - - - 50.00 7/1/2003 - Presque Isle 2 - 20.00 36.92$ 20.00 - - - 30.00 6/18/2003 30.00 Presque Isle 1 20.00 40.00 46.00$ 21.00 1.00 19.00 19.00 20.00 6/21/2003 20.00
Total 40.00 21.00 550.00
Titles difficult to interpret
Corporate Modeling Apr 18, 202386
Auditing Suggestions
• Mechanical Checks
• Compute Comparative Ratios
• Test Extreme Values
• Perform Sensitivity Analysis
• Compare Forecasts to History
• Do not be afraid to re-do models
Corporate Modeling Apr 18, 202387
Mechanical Checks
• Balance Sheet Balances
Use abs() function
Check in each year
• Project Finance
Positive Dividends
Ending debt and asset balance
Source and use statement balance
• Corporate Model
Historic Income Reconciles
Historic Balance Sheet Ties
Corporate Modeling Apr 18, 202389
Comparative Ratios
• There is no magic formula
Compute and Graph
• Interest/Debt
• Depreciation/Gross Plant
• EBITDA/Sales
• Dividend Payout Ratio
• Return on Investment
• Return on Equity
Put in very simple cases
Corporate Modeling Apr 18, 202390
Test the Model with Extreme Values
• Put in 100% Equity and make sure cash flow before financing equals free cash flow
• Put in beginning and end of year to test year fraction inputs
• Put in large negative cash flows to see what happens
Corporate Modeling Apr 18, 202391
Auditing
• Keep Inputs from Formulas in the same sheet
• Use Range Names for Scalars and Arrays
• Use Sensitivity Analysis
• Try Model with Extreme Values
• Check Balance Sheet, Sources, Total Construction, Total Debt, Ending Balances, Dividends etc.
• Total Debt Issues = Debt on Balance Sheet
• Historic Assets = Modeled Assets
• Historic Income = Modeled Income
Corporate Modeling Apr 18, 202393
Two Methods for Audit
• Method 1: Trace the formulas
Use F2 key
• Method 2: Test model with extreme inputs
Example – Move the cash up and down and make sure the debt and cash are working
Corporate Modeling Apr 18, 202395
Time Periods in Models
• Reasons for small time increments
Accurate interest expense
Accurate revenue or expense accounting
Timing of capital expenditures
Corporate Modeling Apr 18, 202396
Method for Accounting for Small Time Increments
• Keep track of dates
• Insert time annual and periodic time periods at top of the sheet
Use look-up tables
Use if statement to increment time periods
• If prior quarter < 4, increment by 1, otherwise reset to 1
• If prior month < 12, increment by 1, otherwise reset to 1
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Use of Sumif to Aggregate Small Time Increments
• The sumif command can be used to aggregate monthly or quarterly figures into annual amounts
• Sumif (sum range, year, periodic range)
Use absolute cell reference for the sum range
Use the absolute reference only on the row number for the year
Use the absolute reference only on the column name for the periodic range
Sum Range Year Periodic Range
Corporate Modeling Apr 18, 202398
Debt Modeling Concepts
• Use cork screws
• Look-up tables for installments and interest rate
Look-up tables with TRUE where use less than or equal to for the period
• Periodic computations
In project finance, combine with monthly source and use statement
• Test re-payment using min statement and beginning balance
Min beginning balance, scheduled repayment
Corporate Modeling Apr 18, 2023100
More Issues
• How can we make the models flexible enough to incorporate inevitable delays in construction and alternative retirement dates?
• What are some of the excel rules that guide accurate and efficient development of models?
• How can project finance models be audited to check errors that we will make?
• What should we do to incorporate alternative debt structures and interest during construction into the model?
Corporate Modeling Apr 18, 2023101
Model Checks
• Add a balance sheet and check to make sure that it balances
• Lower assumptions and see what happens when there is negative cash flow
• Check the final balances of assets to make sure they are depreciated
• Make sure the sources of funds equal the uses of funds
• Check the ending debt balance
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Income Statement Checks
Relate various lines from the income statement to the balance sheet:
Consistency of expenses and revenues with history if possible
Check average interest rate: Interest expense divided by the average debt
Compute depreciation rate: Depreciation expense divided by the gross plant
Growth rates on prices and expense ratios
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Check the Financial Statements
• Read the financial statements
Be able to explain trends in EBITDA and Operating cash flow relative to historic data
Evaluate the capital expenditures as compared to historic amounts
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Other Checks
• Dividends should be logical -- there should be no dividends during the construction period
• Logical dividend checks - you must not allow negative dividends
• Vary the economic assumptions and see if the results change as expected. Don’t try to explain away illogical results
• Print out the financial statements and read them. This is old fashion, but it is the best check.
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Model Transparency
• Transparency is not a precise concept, but in general, the model should
Show the key drivers
Allow an audit that can be performed in a couple of hours
Clarify what are inputs and what are outputs
Financial statements should be a primary part of the model
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