Spreadsheet Conventions

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.


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.


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


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%


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


Model Organisation


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


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)


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.


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.


Example of Moving Between Sheets

Colors correspond

to sheet names

Macro named spreadsheet colors all sheets will perform this function automatically


Colors Should Mean Something

There are yellow, red, blue and black codes.

There is no documentation of what the colors mean


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


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


Model Organisation: Make Inputs Easy to Find and Calculations Easy to Follow


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


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.


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


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


Model Formatting: Comments, Column Set-up


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


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.


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


Efficient Layout with Indents


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


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.


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


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


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)


Example of Inconsistent Periods

Where there are inconsistent periods,Financial ratios and returns are moredifficult.


Corrected Approach with Replacement and Retirement

Automatically retires and replaces assets

Instead of blanks, this sheet has formulas with zeros.


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


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.


Simple Formulas


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.


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.


• 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


Example of Too Complex Formulas

When formulas are this long, it is very difficult to audit them


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.


Example of Complex Formula

If Statement and Difficult to Follow Look-up tables


Documented Lookup Table

Look-up table inputs are near the look-up table and are illustrated, range names are used


Simplified Formula

Formula is still a little complex, but it is illustrated from lines above and it is documented with range names


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.


More Readable Excel

• The following example still uses the excel commands, but at a bit more understandable


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


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


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


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


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.


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


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.


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.


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


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.


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.


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


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


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.


Example of Switches Difficult to Find


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


Example of Problems without Cork Screws – Cannot See Flow of Capacity


Corrected with Cork Screws

Clearly lay out the beginning balance and the ending balance


Use of Cork Screws

Beginning Balance of current year is the ending balance of the last

year


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


Range Name Advantages, Disadvantages and Optimal Use


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


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


Range Name Conventions

• Document name of the range in the spreadsheet

• Can color named ranges

• Clean-up range names

• Use range names in macros


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.


Example of Range Names

Example of Using Range Names in the model


Problem with Range Names – Delete a Name and You Get Errors

Name Box


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


Spreadsheet Convention: Keep Top of Sheets in Same Format when Working with Multiple Sheets


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!


Working with Dates in Models


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


Excel Tools


SPREADSHEET CONVENTION: Do not force different inputs to be the same

• Example:

Book life and economic life

Book depreciation and tax depreciation


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)


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


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.


Auditing and Documentation


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


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


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


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


Example of Mechanical Checks


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


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


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


Use of Sensitivity Analysis and Tornado Diagrams to Check Model


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


Reference: Modeling Concepts


Time Periods in Models

• Reasons for small time increments

Accurate interest expense

Accurate revenue or expense accounting

Timing of capital expenditures


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


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


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


Model Checks


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?


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


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


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


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.


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


Simple Example


• Circularity

• Columns

• Solver – try by hand

• Solver – number of iterations

• Complex

IDC

Plant Additions

Plant Retirements

• Redundant Stuff

• Subtotals

Documents

Spreadsheet Conventions